IEOs – Initial Exchange Offerings
Prepared by Colin Platt
Posted August 7, 2019
Colin Platt here again, time for another blog, exploring some of the topics that Zeth, Shaun and I found interesting and noteworthy. It has been a while since we did a deep dive, happy to be back to it. As always, nothing here should be construed as financial advice, recommendation or endorsement of any project or cryptocurrency.
Just when you thought that crypto had exhausted every possible permutation of three letter acronyms they surprise you once again.
Today we look at one of the latest trends in using tokens to fundraise, IEOs.
Let’s start with a quick explanation of what these things are. Most readers will know what ICOs, or Initial Coin Offers, are: teams selling crypto tokens to investors to finance the development of a project. Generally ICOs have worked somewhat like crowdfunding, where the ICO seller announces the amount of tokens to be sold, a price (in USD or crypto), and a start date for the sale. Some projects opt for more complex processes where the price increases over time, or after a certain amount is sold, still others go through a more complex auction process. One of the main selling points of ICOs as an investment was that they commonly offered investors liquidity shortly after the completion of the token sale. However, things were not always so simple.
Though ICO teams usually had exchange listings as part of their token sale roadmaps, would enter into partnerships during and after the sale it was always a risk that they would have no, or only minor -exchanges willing to list them. Listing on the more prestigious, larger exchanges, usually meant higher returns for early investors and greater liquidity when it came time to sell. Many exchanges understood this and sought fees from ICOs looking to list after a sale, which could often measure in the hundreds of thousands of Dollars.
While exchanges initially found listing fees profitable, they quickly understood that by accepting them, clients would no longer see the fact that listing on a large exchange was a mark of distinguishment, thus degrading the overall perception of the exchange itself. In addition, while generous, these fees could also end up leaving the exchange with large potential legal liabilities should regulators decide to clamp down. In an effort to maintain this source of revenue, their brand perception and try to take the heat off themselves, exchanges pivoted to become involved significantly earlier in the fundraising cycle.
Enter the IEO.
The IEO process looks somewhat similar to the ICO, however with one critical difference. Teams looking to fundraise with a token work with a potential exchange in the early stages, going through due diligence on their idea, team and plan, and structure the details of the fundraise with dedicated teams at the exchanges. During the token sale itself the token uses tools provided by the exchange and accepts funds, which have gone through the normal KYC processes of the exchange. Having provided these services, exchanges can charge a fee in good conscience. And although simply running a token sale through an exchange doesn’t guarantee listing on that exchange, there are reassurances for the exchange that the team would have passed the basic levels as part of that process. More reputable exchanges will generally segregate the IEO team from the teams which decide which tokens get listed, though this is not a universal process.
In addition to third parties raising funds via IEO, the exchanges themselves have used the tools and customers they already have to raise funding. Some examples are Binance Coin (BNB), Bitfinex’s Unus Sed Leo (LEO) -which raised more than $1bn, Huobi Token (HT), as well as more recent FTX token (FTT).
Despite their success, having effectively replaced ICOs, IEOs have not been without their controversies. Investors have complained that many IEOs have given preference to insiders, selling out millions in seconds, or otherwise employed unequal terms that favoured some groups. Teams have reported paying money for the IEO process only to be hit with unanticipated fees, and receiving less than they had expected. As with ICOS, questions around the legality of IEOs still abound. Still others question how real the raises are, pointing to the fact that with ICOs you can at least see the sales via the transactions on the blockchain themselves.
Post launch IEOs have also had questionable returns, despite common jumps on day one, returns have not always fared well. This continues to pose the question about the suitably of IEOs as investments for the retail investing public, which may not have the time to properly research the prospects of the investment, or be able to withstand the risk of capital loss.
Despite this, IEOs present an interesting evolution in the token-based fundraising space, and help answer some of the basic questions, as well as giving some level of assurance about projects. The current incarnation may be ephemeral, ultimately giving way to the next iteration of this trend. It is clear though that fundraising leveraging crypto assets is a trend that is not likely to disappear in the short term.