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A Comprehensive Guide on Initial Exchange Offering (IEO)
When is the best time to invest in a cryptocurrency?
Your answer could be the time when the prices are lowering or just starting to rise. And this answer is somehow correct only in the case that this crypto is in the secondary market. But, what if I tell you that you can buy new digital currencies even before they hit the secondary market, just when the prices are at their lowest?
Actually, this process is called fundraising, where crypto-based companies offer their token or digital coin in order to raise capital, for different purposes like scaling, hiring skilled professionals, or even further investing.
There are more than 8 different methods for fundraising. Among them, Initial Exchange Offering(IEO) is one of the most secure and advanced fundraising methods in the crypto industry. And you might be wondering how it works, what it actually is, right?
Worry not, this is a complete guide on IEO to help you understand its working mechanism, how it is different from other methods, its benefits, risks involved, and other relevant information that you need as an investor or a crypto-based startup owner.
So, without taking your time any further, let’s get straight into the true definition of Initial Exchange Offering(IEO) as a start to this blog.
An IEO is a cryptocurrency fundraising method introduced in early 2019, where a blockchain-based company or a project sells its tokens to investors directly through a partnering cryptocurrency exchange. During the overall IEO cryptocurrency fundraising process, the exchange acts as a trusted intermediary, vetting the project and managing the token sale for its users.
Is this a bit difficult to understand?
Let me make it relatable with a simple example.
Imagine yourself as a bakery owner trying to launch your new recipe cake in the market. So, you consult with a marketer or a mediator who can examine your recipe and its overall quality and taste. Then, the customers interested in the cake will also connect with the mediator by validating that they are serious buyers with valid documents. Finally, the mediators will securely exchange your cake with the customer’s money and earn through the different kinds of fees.
Since you are aware of the Initial Exchange Offering(IEO), let’s explore IEO vs ICO differences and the IEO vs STO comparison in one go with this differentiation table.
| Comparison Factor | ICO(Initial Coin Offering) | IEO(Initial Exchange Offering) | STO(Security Token Offering) |
|---|---|---|---|
| Definition | It is a decentralized crowdfunding method where crypto-based startups issue tokens directly to investors. | It is a fundraising process where a crypto-based startup offers its token through a cryptocurrency exchange platform. | It is a regulated fundraising process offering security tokens with strict regulatory frameworks. |
| Introduced Year | 2013 | 2019 | 2019 |
| Regulatory Status | Unregulated | Semi-regulated through exchange vetting processes. | Fully regulated with strict securities laws and regulatory frameworks. |
| Cost of Implementation | From $10,000 to $50,000. | Based on exchange fees and listing requirements | Starts from $100,000 |
| Target Investors | Open to all cryptocurrency holders with appropriate wallets. | Limited to users of the specific exchange conducting the IEO. | Mostly restricted to “accredited” investors, especially during early funding rounds. |
| Platform of Sale | The company’s website or a dedicated ICO platform | Cryptocurrency exchange platform | Specialized security token platforms |
| KYC/AML Responsibility | The project team is responsible for conducting verification processes. | Exchange takes responsibility for KYC/AML verification. | Strict KYC/AML requirements are required. |
You just learned the basic concept of Initial Exchange Offering and its difference from STO and ICO. Now we are here to learn how the IEO token sale process works and distributes the token to the investors. So, let’s begin.
The first step of the IEO process starts with proposal submission, along with necessary documents, to the cryptocurrency exchange’s IEO launchpad. The necessary documents that are to be included with the proposal are its whitepaper, tokenomics, team credentials, and roadmap.
The second step of the process is called Due Diligence. It is a technical term of the process when the exchange starts to examine the project details closely. While auditing the project and its necessary details, the exchange analyzes its feasibility, team expertise, legal compliance, and market potential. So, after completing this whole process, the exchange decides whether the project is eligible for the market or not.
After completing the Due Diligence process, the exchange and project team move ahead with finalizing token prices, sale structure, and marketing strategies.
Then, the next step in the process is marketing the token. The exchange starts to promote the token and its features to its user base through email campaigns, social media, and partnerships.
When the investors learns about the new token, they start to join the exchange and complete the KYC/AML verification process. Plus, they also start to fund their accounts with supported cryptocurrencies and prepare for the token sale.
Then, the sale opens for a limited time. So, the investors must purchase tokens directly through the exchange’s platform within the allocated time.
After that, the tokens are divided via a lottery or a first-come, first-served model. Then, the exchange distributes purchased tokens to investors’ wallets. In case some of the tokens are unsold, they may be burned or reallocated.
Lastly, the token is listed on the exchange shortly after the sale. This will allow the investors to either sell the token or buy more for further investment.
CoinList is one of the top launchpads established in 2017, located in San Francisco. It is based on both ICO and IEO fundraising methods, and is known for providing early access to high-potential blockchain projects. Further, it also supports community building for Web3 startups.
Binance Launchpad is one of the largest cryptocurrency exchanges in the world, which is an IEO-based platform of Binance. One of the interesting facts about it is that this platform has a user base of more than 150 million active users.
Similar to Binance Launchpad, Bybit Launchpad is an IEO-based platform of Bybit, a relatively new but rapidly growing crypto exchange platform. It offers a streamlined fundraising process for the project and offers investors early access to the new token.
“The exchange is staking its reputation behind the projects on its platform, offering a higher degree of trust behind the project.” - Binance Academy
Like the quote says, IEO stakes its own reputation behind the projects, making it trustworthy and the best choice for fundraising. Now, let’s talk about other benefits that make it a more viable option to raise funds from investors.
In the case of ICOs, they directly connect to the investors, leading to scams and fraud. On the other hand, IEOs offer an enhanced security standard and trust levels in token offerings.
One of the key features of IEO security measures that makes it trustworthy is its vetting process. Here, the exchange goes through a detailed due diligence process before the token sale. This helps to validate the eligibility and genuineness of the projects trying to launch an IEO. In particular, the due diligence process involves the following actions to validate the project:
Further, when a reputable exchange is involved in the fundraising process, investors can have more confidence in the token and its genuineness.
Additionally, most of the IEO platforms make the project go through smart contract audits by independent third parties to make sure the technology of the token is secure and works as it should. In this way, smart contracts in IEOs enhance their security.
As the fundraising process requires reaching a larger group of people, IEO can surely fill this requirement. Why?
This is because exchange works for multiple projects, and already has a large user base that goes up to millions. For instance, Binance Launchpad has a user base of over 150 million registered users. So, you can imagine the magnitude of the reach through the IEO process. Further, this eliminates the efforts to build a different audience.
Also, the user base of the exchange is the one who is already interested in cryptocurrency and wants to invest seriously, unlike ICOs, which need to find a target audience while reaching out.
Further, most of the exchanges include people from all over the world in the user base, making it easier to reach a global audience.
Another major benefit of choosing IEOs for the fundraising process is their immediate liquidity feature. In simple words, the tokens are guaranteed to be listed on the exchange, where the offering takes place. So, these feature of immediate listing eliminates the risk of not getting listed, as ICOs have. Further, the investors also don’t have to wait a long time to trade the token in the secondary market.
As said earlier, the guarantee of immediate listing boosts the confidence of the investors, which can further lead to an increase in the token sales. Then, when the tokens are listed on the exchange, more investors get interested in the trading of the tokens. As a result, a chain of positive sentiment for the tokens starts, which can lead to the price of the token skyrocketing.
In the field of cryptocurrency, the regulations are complex and confusing enough that it can be considered a great challenge for new projects trying to launch their tokens. However, choosing IEO can be a great choice as it ensures the project makes sure that the regulatory requirements are completed as per the rule.
First, it is well known that exchanges that host IEO processes have a compulsory Know Your Customer(KYC) and Anti-Money Laundering(AML) process that all the participants must complete. This checks out the basic regulatory requirements and helps to prevent fraud and scams.
Furthermore, the exchange has its own legal teams to understand the evolving regulatory framework and get guidance accordingly. This expertise also helps the project avoid the unnecessary violation of securities law or other financial rules.
Also, the due diligence documentation can be useful whenever the project faces regulatory inquiries in the future.
It is a known fact that marketing can be expensive, and exchanges that host IEOs hold a large user base that could go up to millions. So, by connecting the dots, it can be said that choosing IEO for fundraising can provide a huge audience reach without much effort in marketing.
For instance, the reputed exchanges promote their brand using different platforms like social media, banner advertisements, newsletters, and so on. So, these well-established advertising channels can be used to market the token before its launch to enhance its visibility.
In addition, many exchanges offer comprehensive packages with IEO marketing strategies that are specifically designed for particular IEO projects. So, it can be helpful for the new companies as they don’t have to create a new marketing plan without much experience.
We just explored the benefits of Initial Exchange Offerings, but it comes with some disadvantages, too. So, now it’s time to learn some risks associated with choosing IEOs.
Although IEO offers an enhanced and secure fundraising method, it comes with higher upfront fees than ICOs. Also, the cryptocurrency exchanges charge high fees for hosting IEOs on their platform, which can be problematic for startups with limited capital. In particular, the listing fees can go up to tens of thousands and even hundreds of thousands of dollars, in some cases.
In addition to the listing fees, there are many additional ongoing costs. Likewise, many exchanges also charge a few percent of the funds raised during the IEO in the name of a revenue-sharing model. As a result, it can have a lot of negative impact on startups with a limited budget.
When a cryptocurrency startup or project is handed over to the IEO-based exchange, it is equivalent to surrendering significant control of the project itself. In particular, the exchange acts as both gatekeeper and intermediary. Further, the exchange platform is also the one that decides listing timing, pricing strategies, and the token distribution process.
Likewise, exchange also controls most of the marketing and presentation of the token to the investors. This is because the exchanges are the one who presents the token to their user base, acting as a primary communication channel. So, it can lead to a communication gap between the project team and the audience.
IEO is the best method to raise funds for blockchain-based startups and to get new, secure tokens earlier for investors. To be specific, it is an enhanced token offering platform where the project owner needs to select a mediator for the distribution of the tokens, unlike ICOs that directly connect with the investors.
And in this blog, you get to learn almost every aspect of an Initial Public Offering, starting from the basic definition. Then, you explored the differences between IEO, ICO, and STO, followed by the working process of IEO. After that, you learned about the top three IEO launchpads like CoinList, Binance Launchpad, and Bybit’s launchpad. Likewise, you learned about the benefits and risks of choosing IEO for fundraising.
So, whether you are an investor trying to get early access to the new potential tokens or a blockchain-based company owner, understanding IEO is crucial. Therefore, learn as much as you can to leverage the benefits of IEO, avoiding the risks associated with it.
