What Is An Initial Exchange Offering (IEO)?

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August 6, 2024 06:05 EDT

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An Initial Exchange Offering (IEO) is a fundraising strategy in which a cryptocurrency startup sells its assets through an exchange rather than directly to investors.

One great example of a successful IEO is the BitTorrent Token (BTT), launched by Binance Launchpad. It was initiated in January 2019, and in just 15 minutes, it raised $7.2 million in tokens. The funds were intended to integrate BitTorrent, a peer-to-peer file-sharing protocol, with blockchain technology, enhancing its ecosystem and incentivizing users through token rewards. The end game was 60 billion BTT tokens sold to over 23,000 buyers.

After observing the success of Binance IEOs, more notable exchanges started to copy the model. Another notable IEO was launched via Bittrex International. Veriblock (VBK) raised $7 million in under 10.4 seconds. Later, this record was surpassed by a Blockcloud IEO conducted via OKX Jumpstart, which sold out $2.5 million worth of BLOC tokens in a single second.

What Is the Definition of an Initial Exchange Offering (IEO)?

IEOs are another way to crowdfund various cryptocurrency startups through a cryptocurrency exchange acting as a mediator. With crypto exchange’s help, projects get significantly more exposure, interest, and credibility. After a successful IEO, the token issuers pay a listing fee and an agreed amount of tokens for using IEO platform services. Soon, the tokens will be listed on the exchange, where investors can access instant liquidity.

Many people in the crypto space call IEOs the next step in ICO evolution. Since Initial Coin Offerings are unregulated, and most were scams, Security Token Offerings were supposed to be a fix. However, most STOs remain constrained by slow and expensive processes and stifling regulations. So, IEOs were the middle ground that addressed issues on both sides.

IEOs try to promote only legit projects because it puts the exchange’s credibility at stake. Therefore, the vetting process is more profound. Besides, only some ideas manage to get support from an exchange. Also, exchange offerings are more accessible than STOs, which allow almost anyone to participate and invest (except for countries with regulatory restrictions; see below). The token sale team is somewhat less likely to suffer repercussions from regulators due to mandatory investor KYC/AML checks done by the exchange.

Characteristics of Initial Exchange Offerings (IEO)

Like ICOs, Initial Exchange Offerings offer limited coins at fixed prices, limits on the minimum and maximum tokens available for purchase per single user, soft cap and hard cap, and dedicated accepted cryptocurrencies.

However, IEO coins are already minted before the crowd sale, unlike ICO token crowd sales. Besides, they hit exchanges several days or weeks after their IEO, which makes them more convenient for investors (instant liquidity).

Also, the IEO process naturally involves an intermediary (the IEO platform), which is trusted to handle the funds. This raises investor confidence in the project, which most ICOs lack.

Pros and Cons of an IEO

Essentially, IEOs are advantageous due to:

• Increased Investor Confidence: Investors do not deal directly with the IEO project team but with the exchange, which makes it more credible and secure in case things go wrong.
• Security for Both Token Issuers and Investors: Token issuers also gain since IEO platforms manage all things related to regulations, such as mandatory KYC/AML checks for every participant.
• Frictionless Process: IEO platforms ensure almost anyone, regardless of their experience in the crypto space, can easily contribute.
• Guaranteed Exchange Listing: IEO tokens are listed on the IEO exchange soon after the IEO.
• Scam Removal: The IEO project teams are neither anonymous nor fake, so they won’t disappear after collecting your funds.

IEOs also offer several benefits for all parties involved. Due to the exchange’s involvement, projects receive enhanced marketing efforts, greater credibility, increased exposure, and heightened interest.

Exchanges benefit from the influx of new users who sign up to participate in and trade IEO tokens, thereby expanding their user base. Additionally, exchange token holders gain, as IEOs create additional use cases for the exchange’s native token, often increasing its value.

However, IEOs are also subject to the following risks and concerns:

• Unclear Regulations and Restrictions: Many countries have issued restrictions or banned ICOs altogether, which may reflect poorly on IEOs, too. Although it is a slightly different beast, the core principles of an IEO remain the same.
• All Investors Must Comply With AML/KYC: The cryptocurrency community is full of privacy-obsessed individuals, so going through the AML/KYC procedure may be a big no-no for some.
• Market Manipulation and Concentration of Coins: Most IEO tokens are minted beforehand, so you should always double-check token allocation and distribution dynamics before investing. The project team and an IEO exchange may keep an unreasonably large portion of tokens to themselves, which may result in meddling with prices later on. Besides, it’s no secret that most exchanges participate in “wash trading.”
• A Limited Number of Investors: Many investors have complained that not everyone manages to purchase tokens during IEOs.
• Bots: There is a concern about bots that can be programmed to participate in IEOs and beat out human investors.
• FOMO: Remember to research and examine the projects and their ideas yourself. IEO project managers and IEO platforms are incentivized to create as much hype as possible to sell all the coins. Be sure to check the project’s whitepaper, idea, and whether it even needs a token in the first place.

Exchanges That Support IEOs

As of August 2024, exchanges that have launched their own IEO platforms are:

Follow the latest IEO news and updates with Cryptonews.com.

How to Participate in an IEO?

In a way, IEOs make it even easier for an average user. In this case, you don’t need to send funds to a smart contract, double-check transaction addresses, or ensure your transaction has enough gas or fees to be processed on time. A typical IEO process looks like this:

1. Find an IEO you want to invest in.
2. You need to register on the exchange and verify your account, completing the KYC/AML procedure.
3. Check cryptocurrencies that you can use to participate in the IEO and deposit them into your account.
4. Wait for the IEO to start and buy the tokens.

Of course, the process may not be as straightforward as described here, since every IEO platform has its methods of ensuring a fair process for all users. For instance, Binance Launchpad has introduced a lottery-based token distribution method for the Matic Network IEO. Mind that every IEO tends to sell out rather quickly, so be quick and ready when the time comes.

Countries Where IEOs Are Illegal

Unfortunately, not everyone is free to participate in IEOs. The regulations still constrain many countries. Currently, several countries have detailed guidelines concerning IEOs. Some of these countries are the United States, Singapore, Malta, Japan, South Korea, Switzerland, and the European Union.
Since most governments still deem ICOs and IEOs the same way, it is uncertain whether major countries will choose to regulate the market differently. Therefore, like ICOs, IEOs are (or at least could be considered as) banned in some countries, including:

• China
• Nepal
• Afghanistan
• Bangladesh
• Morocco
• Algeria
• Egypt
• Bolivia
• Indonesia
• Iran
• India
• Iraq
• Kosovo
• Mexico
• North Macedonia

Before you participate in an IEO, contact a legal advisor to make sure it is legal to do so in your jurisdiction.

Conclusion

Initial Exchange Offerings (IEOs) represent a significant evolution in cryptocurrency fundraising, offering a more secure and regulated alternative to Initial Coin Offerings (ICOs).

The success stories of IEOs like BitTorrent Token (BTT) and Veriblock (VBK) have demonstrated the potential of this fundraising method, leveraging the credibility and reach of established exchanges. With detailed guidelines in countries like the United States, Singapore, and Japan, IEOs provide enhanced marketing, credibility, and exposure for projects while also benefiting exchanges through new user acquisition and increased native token utility.

However, participants must navigate various regulatory landscapes, as IEOs face restrictions in several countries. Despite the associated risks, the structured nature of IEOs and the involvement of reputable exchanges continue to foster investor confidence and drive the growth of innovative blockchain projects.