Say Hello to Crypto's Newest Kid on the Block, the IEO (Initial Exchange Offering)
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If you’ve been paying attention to the blockchain and cryptocurrency space recently, you've likely noticed more and more mentions of a new abbreviation: "IEO," which is short for initial exchange offering.
So, you're probably wondering: What's an IEO, why are so many people talking about it, and how is it different from an ICO (initial coin offering)? To answer those questions, let's take a deep dive into this new IEO concept and learn why initial exchange offerings more and more are considered trendier and likely to replace the ICO.
Why ICOs aren’t cutting it anymore.
If you’ve participated in an ICO (initial coin offering), chances are you got your coins by going directly through the blockchain project’s website. And that makes sense, because it's easy to see the appeal of the ICO model. For one thing, ICOs --at least theoretically -- facilitate decentralized, crowd-funded project support. And that means that if you believe in a project’s promise, you can support it without its needing to prove a high net worth or approach the gatekeepers that we call financial institutions.
Yet ICOs are also highly unregulated. And while stringent regulation isn’t necessarily a better scenario, there’s plenty of evidence that the gold rush mentality of peak, unregulated ICO fervor has had plenty of undesirable outcomes. A 2018 Boston College study found that over 50 percent of projects studied had failed within four months of their ICOs.
And, while new startups are more likely to fail than succeed in any industry, there’s some evidence that criminal intent -- not just bad luck or misguided business plans -- factors into this high failure rate among ICOs. A Statis Group study of 2017 ICOs concluded that while the majority of funding dollars went to high-quality ICOs, the majority of tokens purchased benefited scams.
Of course, learning that an ICO has failed due to incompetence rather than malice is hardly a consolation if you hold that ICO’s tokens. The financial loss stings either way. That’s why the SEC has taken an increased interest in ICOs, cracking down on what it sees as unregistered securities sales. Projects interested in avoiding such SEC scrutiny, meanwhile, have shied away from ICOs. Token purchasers worried about losing funds have backed off from the ICO format, as well.
Why IEOs, in contrast, show promise
You can lessen, but not eliminate, the risks of participating in a token sale if you do robust research. But research takes time and effort. That's why, at the end of the day, you'll feel better about your purchasing decision if you secure the input of a trusted expert, in addition to your own opinion. That’s where IEOs come in.
Projects launching an IEO typically partner with an exchange to sell their new tokens. Purchasers go through the exchange, not the project’s website, to purchase tokens. This arrangement solves problems for all parties involved:
- Purchasers can be confident that their IEO tokens have undergone a vetting.
- Projects can outsource marketing and KYC/AML compliance to exchanges with significant staff and resources while benefiting from their exchange partner’s professional reputation among traders.
- For the exchanges themselves, IEOs can be lucrative because the exchanges charge partners sign-on fees and a cut of each sale. They can also corner the market on a hot new token.
So, are there any downsides? Definitely, but it’s not clear if those downsides are enough to slow down the IEO trend. Specifically: Exchange involvement is supposed to add a layer of reassurance and reliability for both token purchasers and sellers. But unfortunately, not all exchanges are trustworthy; some have been accused of poor management or lax security measures. In addition, a small percentage have been exposed as frauds. And certainly any of them are capable of making well-intentioned but ultimately misinformed or unlucky judgments about potential partnerships.
In fact, a prestigious exchange takes on reputational risk by participating in an IEO. That's why Bittrex pulled out of the RAID IEO after learning about that project’s partnership troubles. As mentioned, exchanges also take a cut of IEO proceeds. So while the risk may be worth it for many blockchain teams,the exchange's cut will affect consumer prices and the project’s total revenue.
Some blockchain enthusiasts dislike IEOs simply on principle, objecting to the centralization of revenue flow in a decentralization-oriented space.
While IEOs certainly adhere much more closely (than do ICOs) to the principles of consumer protection espoused by the SEC, they’re hardly in the clear with regulators. Exchanges, not just ICOs, have tangled with the SEC and other regulatory bodies regarding adherence to securities laws.
New York State's Department of Financial Services, for example, rejected a “Bitlicense” application from Bittrex that would have given that exchange permission to operate in the Empire State. Another example? The SEC brought formal charges against the founder of EtherDelta, citing operation of an unregistered securities exchange.
Accusations like these, however, can go both ways: Ocean blamed the underwhelming sales its first IEO attracted on its attempts to comply with U.S. securities regulations.
The past, present and future of the IEO
So, can the IEO work as a fund-raising tool? Results over the past few months signal that the answer is yes: KuCoin’s new IEO platform, "KuCoin Spotlight," for instance, sold out its MultiVac IEO in seven seconds, raising over $16 million. Hong Kong company Percival raised $35 million through its IEO partnership with Coineal. Bibox has launched a lottery and rewards subscription program to address the overwhelming demand for its IEOs. And the Blockcloud token sale reportedly sold out within one second -- though critics pointed out this was likely impossible without substantial bot participation.
What lies ahead for IEOs? It’s hard to say for sure, but the future will certainly be shaped by how the crypto community self-polices, how regulatory bodies do (or don’t) intervene and how effectively blockchain projects themselves create feasible use cases.
Utility tokens hold long-term value only when they have functional platforms that people use. That being said, IEOs don’t create those valuable, next-generation platforms. But they could become stable fundraising tools for the companies building them.