In 2018, an alternative to ICOs appeared – Initial Exchange Offerings (IEO). The main difference between these methods of attracting funding lies in the critical role of the exchange, which selects promising and viable projects(in its opinion).
With an ICO, a listing of tokens on the exchange may be delayed by several months after the completion of the token sale, and usually, projects lose a lot of hype during the process. In the case of IEO, the exchange is initially the critical partner of startup. So, it can issue tokens and sends them to the exchange. That, in turn, distributes digital assets among interested investors who are verified users of the trading platform.
Instead of the usual ICO, where investors send funds to a smart contract, an IEO participant needs to register (and, as a rule, verify) on the exchange, transfer funds to the account and after starting the token sale, purchase coins from the exchange directly.
The agreement between the exchange and the organizer of IEO may contain various conditions: the maximum sales cap of tokens per investor, a predetermined asset price, hard cap,soft cap, the percentage of sales and a fixed amount of funds for the trading platform, the distribution of marketing costs, etc.
The scope of the Initial coin offering has developed rapidly over the past few years, but by the end of 2018, it had almost exhausted itself. The reasons for this are legal uncertainty, non-fulfillment of promises, bankruptcy of many projects, fraud and the lack of mechanisms to protect the rights of investors as well as the tightening of measures by financial regulators.
Maybe an improved method of raising funds will become a natural result of the ICO boom and will repeat its success, thereby restoring confidence in token sales.
Let us look at the main advantages of IEO for investors.
The exchange assumes due diligence of projects, assessing their investment attractiveness, the viability of the products being developed, risks, financial condition, market position, etc. The fact that the marketplace takes on reputational risks increases the level of investor confidence.
In the last few years, ICO projects shifted public offering to private offerings, which are generally accessible only to large investors. IEO democratizes the process of investing in digital assets, making it available to a wide range of participants.
If the exchange on which IEO is held is centralized, then the likelihood of the so-called “gas wars” is excluded. We are talking about a situation when the participants in Ethereum token sale compete with each other, setting high gas limits. This is done to increase the speed of transactions and the first to acquire the tokens.
From an exchange and project side, IEO has some other benefits as well.
The main advantage of this approach for the projects is a ready base of potential IEO participants from a vast number of exchange users. This reduces marketing costs.
Besides, both project and exchange are doing marketing of the IEO. Such an approach not only saves money but also creates a synergy effect, which increases the efficiency of tokens promotion to the market.
The primary source of income for the exchanges is trade commissions. More users and coins in the listing means more transactions and, accordingly, higher revenue from commissions. Holding IEO on its platform gives the exchange the opportunity to attract new users and offer, at times, exclusive coins that are not available at other sites. All this increases trade volumes and, consequently, income.
In the case of ICOs, listing on the exchange is the next logical step after the completion of the token sale. The listing procedure is often costly and time-consuming. At the same time, there are no guarantees that the coin will be available on the favorite exchange and will become liquid. IEO optimizes this process as tokens almost immediately become liquid.
Tokens issuers, in any case, will have to pay considerable sums for the listing, which may differ on different exchanges. Also, the marketplace may require a certain percentage of the total amount of funds raised.
Projects distributing tokens through IEO bear the main marketing costs. These expenses are considerable, and their total amount can easily reach $ 100 thousand or more.
Exchange team should consist of qualified and technically savvy analysts who can competently and systematically evaluate the long-term potential of projects and the viability of their business models. In the event of a campaign failure, the exchange carries significant reputational risks.
Recently it became known that the largest cryptocurrency exchange Binance has restarted its Launchpad platform for token sales. This platform was initially launched in August 2017.
Now on Launchpad, they are preparing to launch the token sales of BitTorrent and Fetch AI projects. In general, Binance promises to hold at least one IEO monthly in 2019.