Following the 2017’s ICO scams that devastated many investors, the crypto space has, in the past year, evolved to provide a more secure solution for raising funding. In Initial Exchange Offerings (IEOs), crypto exchanges are used as a middleman to protect investor funds from scammers while promoting new projects for crowdfunding.
Investors can significantly lower the risks of taking part in a token sale if they do robust research, but research can often take a lot of time and effort. Consequently, many are opting to trust their purchasing decision to a trusted expert. That’s where IEOs come in.
Why IEOs Show More Promise than ICOs
Many exchanges worldwide have launched their own IEO platforms that host a variety of promising blockchain projects. Others, like Coinbase, are evaluating the launch of IEO platforms in the near future.
In this way, projects launching an IEO usually partner with a crypto exchange to sell their tokens, while investors go through the exchange to buy tokens. This offers a safer investment set-up since buyers can be confident that their IEO tokens have undergone thorough vetting.
In terms of security issues, IEOs are more reliable. However, there are situations in the past when someone duplicated a website which was conducting ICOs, misleading people into investing their money into the wrong place.
With an IEO, only already-existing clients of the exchange platform can get involved, which reduces the risk of someone cloning the platform itself.
Furthermore, the limit on the number of tokens that can be purchased at IEOs (typically capped at $20,000) has greatly amplified the appeal of IEO offerings to retail investors, while prohibiting big investors from dominating them.
Moreover, IEOs tend to run for shorter times, and in comparison to the large sums requested in ICOs, are prone to smaller hard caps.
The IEO Trend Started With Binance
Binance was the first major exchange to latch onto the IEO trend, with the introduction of Binance Launchpad in January 2019. The crypto trading platform steered the sale of the BitTorrent (BTT) token, raising $7M in the first several minutes of the sale opening.
While Binance doesn’t currently have any IEOs open, winning lottery tickets are currently being claimed, enabling IOE investors to purchase tokens.
Some of these interesting projects include Perlin – a leaderless proof of stake smart contract platform aiming to raise $6.7 million from the winning lottery ticket holders, selling tokens at $0.77USD/PERL.
Binance also has the Elrond Network, a project aiming to raise $3.25 million for its high-throughput public blockchain.
SEC Cracks Down On IEOs
While IEOs adhere much more closely to the consumer protection laws advocated by the SEC than ICOs do, they’re surprisingly not getting the green light from regulators. Exchanges, not just IEOs, have also tangled with the SEC and other regulatory bodies regarding conforming to securities laws.
For instance, New York State’s Department of Financial Services disallowed a “Bitlicense” application from Bittrex that would have given that exchange consent to operate in the Empire State.
Similarly, the SEC filed a lawsuit against the founder of EtherDelta, claiming he was operating an unregistered exchange.
On January 14, 2020, the SEC urged investors to be cautious about promises made in relation to IEOs. The alert explained that IEOs are similar to initial coin offerings in that they are offerings of digital assets to raise capital, but hyped as an innovation over ICOs because they are offered directly by trading platforms.
The SEC also warned that IEOs offered outside the U.S might be attempting to evade securities laws in the country, and they could be misleading to investors.
2019’s Top IEO Launchpads
Singapore-based exchange, Huobi Global, unveiled “Huobi Prime” in March 2019, with the launch platform having already hosted 7 projects in a period of just several months.
Huobi Prime started off with project TOP Network, an open communication network that raised $8M via Houbi Prime.
While the pioneering launch platform has no IEOs continuing at the moment, most of Huobi Primes’ recently-closed sales have reached their projected hard caps.
Coineal is a large crypto exchange with 101 pairs and around $550 million 24-hour trading volumes. The exchange began offering IEOs in March of last year and has already had approximately 28 IEOs on the platform since its launch.
One of the first IEOs on Coineal was ZeroBank, a blockchain-based legal ecosystem for international money transfers.
A more recent project that closed in July 2019 is Sessia, a social marketplace with CRM, SMM, and logistics management tools for businesses. The sale was hoping to raise $50 million with tokens costing 1.50 USD/KICKS. Full token sales haven’t been unveiled yet.
Vivarium, another IEO that closed in September, hoped to raise $5 million through Coineal so as to provide a virtual reality ecosystem for businesses.
Diamond Open Market is the sole project open currently on Coineal, and it is aiming to create an EOS network to trade naturally grown diamonds.
What Lies Ahead For IEOs?
It’s hard to say for sure, but the future will surely be shaped by how the crypto community self-policies, how regulatory bodies do (or don’t) intervene, and how effectively blockchain projects themselves create viable use cases.
That said, results in the recent past affirm that IEOs work as a fund-raising tool. For example, KuCoin’s IEO platform (KuCoin Spotlight), recently sold out its MultiVac IEO in less than a minute, raising over $16 million.
Likewise, Hong Kong Corporation Percival raised over $35M via its IEO collaboration with Coineal.
For the crypto exchanges themselves, IEOs can be rewarding because the exchanges charge partners sign-on levies and get a share of each successful token sale.
IEOs typically mean more revenues for exchanges, as they host a token sale by doing the vetting process for a fee. Exchanges also get payments when the token begins trading on their platform.
Market observers believe that IEOs came at a time when cryptocurrency exchanges struggled as digital currencies slumped, and crypto buyers reduced. IEOs gave crypto some form of a lifeline.
However, the SEC has warned of offshore trading platforms that attempt to avoid regulatory scrutiny in the U.S by claiming an offering to be outside the country’s securities laws.
This can leave investors without important info about the IEO issuer, the token being offered, and arrangements between the exchanges and IEO issuers that would be helpful to investors trying to decide whether to invest in an IEO or not.