Project failures, policy violations, fraud, a lack of trust, and other ICO-related issues prompted the development of alternative, safer, and more trustworthy means of fundraising that ensure investors do not lose capital and receive some form of return.
In a bid to solve these constraints, startups explored other approaches such as initial exchange offering (IEO), security token offering (STO), initial token offering (ITO), and initial DEX offering (IDO).
What is an Initial Exchange Offering (IEO)?
An initial exchange offering (IEO) is the sale of tokens by a company via cryptocurrency exchanges as a means of raising funds. IEO works similarly to ICO in that tokens are made available in exchange for investment. The distinguishing factor is that, rather than organizing the token sale on the host company’s website or platform, IEO involves crypto exchanges conducting token sales and administration on behalf of the company seeking to raise capital through token sales.
Due to the numerous cases of fraud that have lowered investor confidence and involvement, blockchain start-ups have gravitated away from ICOs and toward other fundraising mechanisms in recent years. Exchange token listing provides potential investors with some confidence because the reputation of the chosen exchange is also at stake.
The Rise of IEO as an ICO Alternative
The ICO Craze of 2017 was considered to be the pinnacle of initial coin offerings. This was due to the mechanism outperforming venture capital and angel investments for the first time, piquing the interest of startups wanting to break into the crypto sector.
The euphoria, however, was short-lived because of a string of unfortunate developments; many startups that launched ICOs failed, and many ICOs became fronts for frauds and rug pulls. In 2018, the Securities and Exchange Commission (SEC) of the United States issued subpoenas to various firms suspected of organizing illegal and fraudulent ICOs. As a result of all of this, the buzz began to fade, and firms, as well as industry players, began to look for new funding avenues.
Binance was the first noteworthy cryptocurrency exchange to provide IEO services to startups. Binance Launchpad, the exchange's first IEO platform, was introduced to "help blockchain projects raise funds and increase their reach across the crypto ecosystem." Binance successfully launched its first IEO of 2019 for a software company called BitTorrent, raising over $7.1 million with a token sale in less than 15 minutes.
Since then, the launchpad has ushered several projects into the market, and other exchanges have followed suit, giving platforms for blockchain startups to obtain funding through token listing and sales.
How Do IEOs Work?
An IEO is a token sale to raise capital through an exchange that works directly with the firm. As a result, the exchange is both a vital component of the concept and the entity that does the majority of the work.
Apply With Crypto Exchange
After the project team has developed the business concept, established a community, created a whitepaper, and made all other necessary arrangements, the team applies to a suitable exchange to launch an IEO on their behalf. The token issuers will then register with the chosen exchange and declare their desire to list and sell their tokens on the exchange.
Exchanges often have conditions that must be met before listing a new project token. There are thorough vetting mechanisms in place to verify that due diligence is conducted and that the project is creditworthy and eligible of listing on the exchange. Typically, exchanges will take into account:
The Project Team
During the vetting phase, an exchange learns important details about the team behind the proposed IEO funding. To guarantee that there is a strong drive for project success, the team's vision and minimum viable product (MVP) or prototype for the project are highlighted and analyzed. A background check is then performed on team members to determine their experience in the crypto industry and specialized industries of business. The exchange also looks into their history with other crypto projects, potential involvement in fraudulent activities and business misconduct, financial records, and other publicly available information.
A whitepaper contains the fundamentals of any crypto project. It gives insight into the project’s seriousness, plans and viability. Hence, the exchange can use the whitepaper to assess the purpose of the project, the problem it intends to solve, the roadmap and strategies for growth and continuity, as well as threats and market competitors. The exchange also confirms that the whitepaper is properly written and not a mere knockoff of another project.
Another crucial consideration for an exchange before conducting an IEO on behalf of a firm is how it intends to handle the project tokens. The exchange may inquire about the type of tokens to be deployed that will attract investors' interest and investment on the platform. Finding out about the token's distinctive qualities, such as mining, staking, governance, and so on, might assist the exchange make a decision. Additionally, the funding process of tokens proposed payment systems for crypto transactions, and the token's demand and supply characteristics are valuable information that the exchange may require.
After thorough review, if the exchange decides to list the project, the firm will be required to pay a listing fee. This varies depending on the exchange and is subject to the terms that are agreed upon. Once that is decided, the exchange may require a percentage of the tokens to be listed, as well as a commission on tokens sold to investors on the platform. Another widespread practice is that exchanges require the usage of their native token to execute transactions such as token buy, sale, or transfer.
In order to participate in token sales, interested investors must have wallets set up with the specified exchange. Before investors may fully participate in funding rounds, the exchange frequently mandates that security procedures such as Know Your Customer (KYC) and Anti-Money Laundering (AML) be implemented.
Exchanges That Offer IEO Services
Here are some of the best crypto exchange platforms that offer IEOs for blockchain startup fundraising:
- Binance Launchpad by Binance exchange
- FTX Launchpad by FTX exchange
- KuCoin Spotlight by KuCoin exchange
- AscendEX Launchpad by Ascend exchange
- Gate.io Startup by Gate.io exchange
- Huobi Prime by Huobi exchange
- BitForex Turbo by BitForex exchange
- BitMart Shooting Star by BitMart exchange
- Bittrex Starting Block by Bittrex exchange
- OKX Jumpstart by OKX exchange
The correct exchange gives a startup visibility and transaction ease of use. This means that after the token is listed, more investors will be able to access it. The exchange serves as a launchpad for the firm, handling tokens and enhancing its marketing and sales capabilities.
The initial exchange offering (IEO) technique is arguably a more popular fundraising option for blockchain startups than ICOs or other types of fundraisers. While the advantages are undeniable, there is still the possibility of pump and dumps, rug pulls, money laundering, and other fraudulent practices. Before investing in any project, whether within or outside of an exchange platform, make sure to DYOR.
Storing your cryptocurrencies in online wallets, exchanges and software wallets exposes you to risks of being hacked. Consider storing them in a hardware wallet today