What Is An Initial Exchange Offering (IEO)?
An Initial Exchange Offering (IEO) is a token sale supervised by a cryptocurrency exchange. IEOs are available exclusively to the exchange’s users. Just like ICOs, IEOs allow investors to get new cryptocurrencies (or tokens) while raising…
An Initial Exchange Offering (IEO) is a token sale supervised by a cryptocurrency exchange. IEOs are available exclusively to the exchange’s users, although some IEOs may take place in several exchanges. Just like ICOs, IEOs allow investors to get new cryptocurrencies (or tokens) while raising funds for promising crypto projects.
What is an Initial Exchange Offering (IEO)?
Many people in the crypto space call Initial Exchange Offerings the next step in ICOs evolution. Since ICOs are unregulated, and most of them turned out to be scams, STOs were supposed to be a fix. However, most STOs remain constrained by slow and expensive processes and stifling regulations. IEOs are the middle ground that addresses issues on both sides.
Although exchange-assisted ICOs were a thing for a while now, IEOs started to gain traction after the launch of Binance Launchpad at the end of 2019. There have already been over 50 IEOs in 2019, which raised over $159 million, as per ICObench.
IEOs try to promote only legit projects because it puts exchange’s credibility at stake. Therefore, the vetting process is more profound. Besides, not every idea manages to get support from an exchange. Also, exchange offerings are more accessible than STOs, which allow almost anyone is free to participate and invest (except for countries with regulatory restrictions, see below), and the token sale team is somewhat less likely to suffer repercussions from regulators due to mandatory investor KYC/AML checks done by the exchange.
Essentially, IEOs is another way to crowdfund various cryptocurrency startups through a cryptocurrency exchange acting as a mediator. With the help of crypto exchange, projects manage to get significantly more exposure, interest, and credibility. After a successful IEO, the token issuers pay a listing fee along with an agreed amount of tokens for the use of IEO platform services. Soon, the tokens are listed on the exchange where investors can access instant liquidity.
Characteristics of Initial Exchange Offerings (IEO)
Like ICOs, Initial Exchange Offerings have a limited amount of coins offered for a fixed price, limits on minimum and maximum tokens available for purchase per single user, soft cap and hard cap and dedicated accepted cryptocurrencies.
However, unlike with ICO tokens, IEO coins are already minted before the crowdsale. Besides, they hit exchanges several days or weeks after its IEO, which makes it more convenient for the investors (instant liquidity). Also, the IEO process naturally involves an intermediary (the IEO platform) which is trusted to handle the funds. However, that also serves to raise investor confidence in the project, which most ICOs lack.
Pros and cons of an IEO
Essentially, IEOs are advantageous due to:
- Increased investor confidence. Investors do not deal with the IEO project team directly, but with the exchange which makes it more credible and secure in case things go south.
- Security for both token issuers and investors. Token issuers gain as well since IEO platforms manage all things related to regulations, such as mandatory KYC/AML checks for every participant.
- Frictionless process. IEO platforms ensure almost anyone, regardless of their experience in the crypto space, can easily contribute.
- Guaranteed exchange listing. IEO tokens are listed on the IEO exchange soon after the IEO.
- Removal of scams. The IEO project teams are neither anonymous nor fake, so they won’t disappear after collecting your funds.
- Benefits for the projects, like enhanced marketing effort by the exchange, more credibility, exposure, and interest in the project.
- Benefits for the exchanges, including new users signing up with them only for the sake of purchasing and trading IEO tokens.
- Benefits for the exchange token holders. Most exchanges use IEOs to add another use case for their native token (if they have one) which is likely to raise its value.
However, IEOs are also the subjects to the following risks and concerns:
- Unclear regulations and restrictions. Many countries have issued restrictions or banned ICOs completely, which may reflect badly on IEOs, too. Although it is a slightly different beast, the core principles of an IEO remain the same.
- All investors must comply with AML/KYC. The cryptocurrency community is known to be full of privacy-obsessed individuals, so going through AML/KYC procedure may be a big no-no for some.
- Market manipulation and concentration of coins. Most IEO tokens are minted beforehand, so you should always double-check the dynamics of token allocation and distribution before investing. Both the project team and an IEO exchange may keep an unreasonably large portion of tokens to themselves, which may result in meddling with prices later on. Besides, it’s no secret that the vast majority of exchanges participate in “wash trading.”
- A limited number of investors. There has been many complains from investors that not everyone manages to purchase tokens during IEOs.
- Bots. There is a concern about bots that can be programmed to participate in IEOs and beat out human investors.
- FOMO. Remember to do your own research and examine the projects and their ideas yourself. Both IEO project managers and IEO platforms have the incentive to create as much hype as possible to sell all the coins. Be sure to check the project’s whitepaper, idea, and whether it even needs a token in the first place.
The first large-scale IEO was notorious BitTorrent launched by TRON via Binance Launchpad in January 2019. Almost 60 billion BTT tokens were sold out in minutes and raised approximately 7.2 million USD.
After observing the success of Binance IEOs, more notable exchanges started to copy the model. Another notable IEO was launched via Bittrex International. Veriblock (VBK) has raised $7 million under 10.4 seconds. Later on, this record was surpassed by a Blockcloud IEO conducted via OKEx Jumpstart, which sold out $2.5 million worth of BLOC tokens in a single second.
Exchanges that support IEOs
As of May 2019, exchanges that have launched their own IEO platforms are:
Bitfinex & Ehtfinex
How to participate in an IEO?
In a way, IEOs make it even easier to participate for an average user. Unlike ICOs, you don’t need to send funds to a smart contract, double-check transaction addresses or ensure your transaction has enough gas or fees to be processed on time.
A typical IEO process looks like this:
- Find an IEO you want to invest.
- You need to register on the exchange and verify your account by passing the KYC/AML procedure.
- Check cryptocurrencies that you can use to participate in the IEO and deposit those to your account.
- Wait for the IEO start and buy the tokens.
Of course, the process may not be as straightforward as described here, since every IEO platform has its methods of ensuring a fair process to all users. For instance, Binance Launchpad has introduced a lottery-based token distribution method for the Matic Network IEO.
Mind that every IEO tends to sell out rather quickly so be quick and ready when the time comes!
Countries where IEOs are illegal
Unfortunately, not everyone is free to participate in IEOs. The regulations still constrain many countries. Only South Korea has a detailed guideline concerning IEOs.
Since most governments still deem ICOs and IEOs the same way, it is uncertain whether major countries will choose to regulate the market differently.
Therefore, like ICOs, IEOs are (or at least could be considered as) banned in some countries, including:
- Bosnia and Herzegovina
- Central Africa
- Cote d’Ivoire
- Mainland China
- New Zealand
- North Korea
- South Sudan
- Sri Lanka
- Trinidad and Tobago
- The United States
Before you participate in an IEO, contact a legal advisor to make sure it is legal to do so in your jurisdiction.