The IEO Gamble: Does it Raise Capital or only Trouble?

Very simply, an initial exchange offering or IEO is a crowdfunding strategy that enables crypto projects to fundraise directly, typically up to $10m dollars, on an exchange portal rather than using company websites like an ICO.  

Until very recently, initial coin offerings had been the fundraising method of choice for crypto startups. However, over the last couple of years, many projects have been re-evaluating whether the ICO model is really the most effective strategy to employ. An increasing number of entrepreneurs are now deciding that an IEO could provide greater access to the funds and investors they need. 

Such has been the popularity of IEOs that it has reignited interest in the crypto investment market. Already in 2019, Binance, which is one of the biggest cryptocurrency exchanges, saw three IEOs sell out within just minutes of their launch.

And that’s not even close to being the best result on the platform. In March, Fetch.AI raised $6 million in just 22 seconds in an initial exchange offering, highlighting the sort of potential that exists.

An IEO differs from a conventional ICO in one key aspect. Rather than tokens being distributed directly through a project’s website, investors buy tokens from a third-party exchange.

This can bring a range of benefits for the investor in terms of their security and freedom, but it can also bring considerable advantages for the project.

There are also a number of other points of differentiation. To buy tokens during an IEO, investors must already be active members on a particular exchange. That is not the case in an ICO.

As trusted third-party platforms, the cryptocurrency exchanges that launch IEOs also carry out their own due diligence on every project. They make sure the claims made by projects are correct and will not permit an IEO to launch if they’re not. Any due diligence carried out on an ICO must be done by the investor themselves.  

There are a number of crucial benefits IEOs have over ICOs which can make a big difference to the fundraising success of a project. That includes:

According to a study by Satis Group, around 80 percent of all ICO projects turned out to be scams in 2017, accounting for one-tenth of all the funds invested over the year. The legislative framework for ICOs in most countries has failed to undergo meaningful improvement, which means investors are still exposed to a high risk of fraud. 

The benefit of an IEO is that the exchange itself has a vested interest in making sure the quality of the projects it lists is high. By carrying out due diligence and partnering with projects before projects are listed, investors benefit from an increased level of security, and that makes it easier for reputable projects to generate the capital they need.  

Rather than having to spend time creating smart contracts and worrying about how to attract prospective investors to their ICOs, developers can leave the promotion and finer details of their fundraising efforts to the exchange platform. That allows the developers to focus on their core activities and concentrate on generating more value for investors. 

Setting up a traditional ICO relies on investors finding the project’s website themselves, which in the whirlwind of a busy marketplace, is certainly not guaranteed. Deciding to list their tokens on one or multiple exchanges will help it get noticed by a larger user base and an existing community of active investors. 

There’s greater transparency involved in an IEO which is much more likely to make an investment forthcoming. The price of an IEO is set before the token is listed and the price remains the same throughout that phase of funding. That means investors will not have to worry about getting a less favorable price than other investors during the same round of funding. Purchases are also straightforward with no additional fees incurred. 

Up to 90 percent of ICO projects are not successfully listed on an exchange. That can leave investors frustrated after the ICO is completed and with little choice but to hold on to the token. An IEO effectively combines the ICO and listing process so investors and businesses are assured that their tokens will move into the regular marketplace once the IEO is complete. 

Although the IEO phenomenon has gained traction as the ICO market has declined, there are still a number of risks that will undoubtedly weigh heavily on entrepreneurs' and investors’ minds:

Many startups might assume that they can be listed on any exchange and raise lots of money. Unfortunately, the process is not quite so simple. An IEO is a service, and just like any other service, it must be paid for through listing and marketing fees. This is a cost not all projects can afford. With the crypto-market changing so rapidly, the listing fees of successful exchanges are only likely to rise.  

While there are a number of compelling benefits associated with IEOs. there are still no guarantees of success. There are a number of factors that must be considered, such as the marketability of the project itself, the market situation, the promotion of the project by the exchange and the preferences of its active user base. 

There are also plenty of critics who argue that the regulation of IEOs is no clearer than ICOs, and it’s potentially even less promising in the future. In fact, Adam Wolfe at Wolfe Miglio, suggests that the IEO model will “take everything from an ICO and make it worse.”

We’ll have to wait and see whether IEOs prove to be a great way to raise capital or a quick way to get into trouble. Just like ICOs, scams, exchange manipulation and regulatory risks are all factors prospective investors and issuers should take into consideration before they take the leap.