With the decline of ICOs following the 2018 crash, investors have been on the lookout for a safer strategy. Indeed, despite their popularity, ICOs failed at keeping investors’ trust — and lost market attention. Then emerged STOs, Security Exchange Offerings, and IEOs, Exchange Coin Offerings, as alternative entities to ICOs.
STOs refer to Tokens which are backed up against a security and regulated by the SEC (or other equivalent national regulators). While STOs offer an alternative route to the traditional funding path behind ICOs, another trend has arrived, which may be the best of both worlds: IEOs - or Initial ExchangeOfferings.
IEOs are Tokens listed through an exchange to raise funds. So what are IEOs? How do they compare with ICOs and STOs? And what does the future hold for this new token listing and fundraising strategy? Let’s explore.
A brief history of IEOs
Soon after the market crash in 2018, ICOs received poor interest from the market. Over 81% of ICOs failed last year with plenty of scams and non-viable projects. In 2019, Cryptopolitan revealed that investors’ interest in ICOs dropped to 95%. China even banned ICOs in the country.
In parallel, STOs, Security Exchange Offerings, appear to be a healthy fundraising strategy as they provide extra protection over the token listing. By listing projects only compliant to the SEC (the Security and Exchange Commission), STOs protect Tokens against fraud. The drawback of this approach is, these offerings are only accessible to accredited investors, which restricts them to people and institutions who already have plenty of money already.
STOs have achieved some success, too, with the examples of Polymath and Blockchain Capital — which respectively raised $207,300,000 in 2018 and $10,000,000 in 2017. Yet STOs face some difficulties as far as increased regulations are concerned. For companies, they require a huge overhead in legal and compliance fees (as much as $500,000 or more). This is why the crypto market has now started to explore what IEOs have to offer.
Pioneered by Binance, one of the biggest exchanges worldwide, IEOs aim at protecting investors. Since an exchange becomes the main intermediary, investors feel reassured in terms of liquidity and the reputation of its members.
IEOs quickly became a successful fundraising road. For example, the popular software file sharing BitTorrent raised $7 million in 15 minutes after launching their IEO. Another great success is the AI project Fetch.ai which raised $6 million in 22 seconds. And thus another door opened for the crypto community.
Today, three of the top 10 exchanges - Binance, LBANK, and Coinbene - have launched an IEO platform, which they call “launchpad”. These exchanges support projects showing a solid business plan and which are compliant with the law.
What are the main differences between IEOs, ICOs, and STOs?
Utility Tokens Listed on a secure exchange platform.
Utility Tokens listed publicly: anyone can list a project and anyone can invest.
Tokens are considered a security in the form of a digital asset, just like a stock, bond, or physical asset.
An audit/analysis of projects is conducted prior to the listing. Participants should be active and verified users of the exchange.
The only requirements to launch an ICO are a whitepaper, a website, and some social media.
Tokens are legally a security and must be in line with regulatory requirements, including KYC and AML.
IEOs are considered the more reliable token offering. Trust and transparency over the tokens are met through a reputable exchange.
ICOs are declining with 81% of failed projects in 2018 due to fraud or lack of interest, which is partly due to the public listing and lack of legal certainty.
STOs are regulated and therefore encourage new investors to come in without any risk of scams or frauds.
Contrary to ICOs, IEOs are not necessarily open to the general public - they require investors to be users of the launching exchange, which sometimes can restrict people from a given geography. IEOs will enable active users to buy the tokens from a dedicated exchange platform — allowing investors to monitor projects and trade safely through the exchange itself.
IEOs represent a lower risk opportunity for investors since all users passed through KYC (Know Your Customer) verification. Finally, all liquidity can be borrowed from the exchange itself, resolving the traditional liquidity issues as seen in the case of ICOs for example.
In comparison to STOs which require a much bigger overhead to be launched and managed, IEOs rely on an exchange’s infrastructure. In the case of STOs, the project team conducts the fundraising, unlike IEOs. Launching an IEO is easier since it’s overseen by the exchange, liberating the team from some of the legal and technical burdens.
What are the main advantages and disadvantages of IEOs?
IEOs enable Tokens to be traded directly and immediately once the project is approved, which is not the case with most ICOs. IEOs provide an extra layer of protection over the identity of traders, and therefore are a more secure option for projects to get funding.
This trust-by-association is truly one of the biggest advantages of IEOs. Recently, Bittrex cancelled the RAID IEO as the company failed to comply with their transparency requirements. Indeed, RAID stepped away from its partnership with the data analytics company OP.GG and the exchange considered it went against customers’ interest.
Yet IEOs are pretty new in the crypto sphere and most investors need to familiarize themselves with the new listing process through an exchange. The safety of exchanges is another variable to take into account, as not all offer the same level of security or assurance.
What is the future of IEOs?
As IEOs provide a more robust legal and technical framework to companies, and more protection to users, some projects which initially launched as an ICO are moving toward an IEO - like the award-winning platform imusify.
IEOs are still in a growing phase but may become the new ICOs soon enough. Cryptoslate reports that $80 million were raised in March 2019 alone — which proves that the markeks are warming up to the trend.
Therefore, with all the benefits IEOs represent (trust, transparency, and immediate availability of funds), there’s a great likelihood to see them become the predominant way of crowdfunding a new crypto project in the near future — and to ultimately become the favourite fundraising strategy of innovative startups.