What is an Initial Exchange Offering?

June 2019
TL;DR: An IEO is essentially a method of fundraising for a project that is conducted in partnership with an exchange, where the exchange lists the project’s tokens as soon as the event ends.

History of the IEO
When ICOs took off, there was a dangerous lack of regulation and oversight in the space. Whilst this allowed legitimate projects to achieve rapid funding and development, there were a large number of ICOs which were considered scams (tokens with no real value which were created by people who were either trying to get rich quick, or didn’t have a sensible business plan or use for their tokens). In the long run, this position was untenable and it wasn’t long before all ICOs began to be tarred with the same brush as dodgy scams or Ponzi schemes.

In order for a measure of legitimacy to be brought to the space (and because regulatory bodies began to become involved), many genuine projects began to comply with regulations by incorporating KYC services or by using STOs if they were offering security tokens (See ‘What is a Security Token and a Security Token Offering?’ here).

Whilst  STOs and adhering to regulations were a vast improvement in many respects over the first ICOs, there was still a great deal of concern in the cryptocurrency and blockchain fundraising scene that many of these projects were not worthwhile; the tarnish left by the ICO craze was not soon removed. In addition to this, many STOs and ICOs struggled to get their tokens listed after their sale ended, leading to frustration for companies and investors alike. To resolve these issues and smooth the path, the IEO was developed.  

What is an IEO?
An IEO is essentially an ICO or STO which is carried out in with a cryptocurrency exchange acting as a counterparty facilitating the project to launch on the platform. Through their partnership, an ICO or STO offers their token through the exchange, which lists their token when the sale ends.

It is expected that the exchanges vet the projects that they partners with, although this doesn’t necessarily mean that the exchanges endorse the projects or that the project will ultimately be successful - investors are still responsible for their own investment decisions. Regardless, the situation is beneficial to the exchange, start-ups and investors alike as it is likely to weed out scams, pump-and-dumps or ill-conceived projects.

Benefits of IEOs
Of course, for an exchange, partnering with an ICO or STO to create an IEO is financially beneficial. The company conducting the fundraising event will normally be required to pay a fee for the service that the IEO provides - though exchanges normally charge to list tokens anyway. Alongside this, providing new tokens on an exchange generates increased interest, traffic and revenue.

For the company behind the token, partnering with the exchange to conduct an IEO, instead of an ICO or STO has a number of benefits, which make an IEO the safer and more convenient option:

  • Legitimacy: Being vetted by the exchange gives another level of legitimacy to a project. When the exchange investigates the project they will look for a number of aspects that an investor would look for (team members, purpose, roadmaps, business model etc.) and will only agree to the partnership and conduct the IEO if it passes their guidelines. This indicates a level of trust, and the information that the exchange used to vet the project may also be included for people to see, making it easier for them to decide whether to invest or not.

  • Compliance: Exchanges require users to undergo KYC so investors in IEOs will already have been through the KYC process and be legally permitted to invest. Companies will not have to pay to outsource KYC or take on the huge legal risk of performing KYC in-house.

  • Liquidity: One of the major issues for tokens is liquidity, when projects complete an ICO or STO and then do not have their tokens listed on an exchange. In an IEO, the exchange lists the token as soon as the IEO finishes, ameliorating the liquidity issue.

  • Exposure: When a token lists on an exchange, it gains exposure to a much larger audience than just those who invested in it. This is likely to lead to greater demand and publicity for the project and can grow interest much more quickly than if the tokens were not available on that exchange.

  • Advice: Whilst the project will usually have to pay an exchange to conduct an IEO, they get not only the listing of the token, but they might also gain access to the expertise and advice of the exchange. This could be related to marketing, networking, compliance, or any other aspect of the project that the exchange wishes to offer guidance on.

  • Convenience: Conducting an ICO or STO takes time and effort, which detracts from the time and effort that the company would probably much rather spend on developing the project. By choosing an IEO, start-ups can focus on what is really important and let the exchange handle the complexities of a token sale.

For potential investors, an IEO is likely to have relevant information about the project to make investment decisions easier. Though an investor ultimately needs to judge a project themselves before they invest, the gathering of some or all of the information they require in one place should make the process quicker and easier. Likewise, having the project on the exchange is also associated with a much reduced or eliminated risk of scams, particularly when the investors know the token is being offered through an exchange as false websites created by bad actors will be less likely to con people.

Investors will also benefit from having the token list on the exchange after the IEO ends, as the lack of liquidity is one of the most common concerns after people buy a token. Having the KYC done through the exchange platform also saves time and effort for investors, as well as reducing the amount of people with access to their data.

Links to useful articles: