What Is an Initial Exchange Offering (IEO)?
Initial exchange offerings, or IEOs, enable blockchain startups to raise capital and issue new digital assets like tokens or coins. IEO platforms facilitate IEOs and oversee token sales, effectively acting as middlemen. Before vetting a blockchain project, these platforms, as well as the project teams, need to do due diligence to protect their reputation and ensure that the project is legitimate.
One of the main reasons for the growing popularity of IEOs is that they’re more transparent than an ICO. Furthermore, IEOs are a relatively accessible and easier way for project developers to get their projects in front of an audience without necessarily shelling out a lot of money for marketing and development.
For investors, participating in IEOs is made simple. They only need to create an account on the IEO platform, undergo verification procedures, and start participating in the IEO. Companies who develop new digital assets can quickly secure capital—some exchanges can generate funds in just a few seconds or minutes—through IEOs compared to an ICO, where fundraising can take anywhere from several months to one year.
Cryptocurrency exchanges also benefit from IEOs in that they can get access to more revenue, drum up interest for them platform, and gain access to exclusive tokens.
In this article, we’ll dive deeper into IEOs, how they work, and what sets them apart from an ICO.
How does an initial exchange offering work?
Startups leverage initial exchange offerings (IEOs) to secure funding for their ventures by working with cryptocurrency trading platforms or IEO launchpads, so they can begin holding a token sale to investors. In a nutshell, initial exchange offerings are basically fundraising events that enable investors to purchase tokens using funds from their exchange wallets.
To minimize the risk of scams and to protect their reputation, these crypto platforms need to perform a series of checks before they can commence a token sale. These checks ensure that the new digital currency is legitimate and satisfies the claims made by startup companies.
Before conducting an IEO, companies need to highlight the benefits of their blockchain project and strengthen it so that they can attract investors. Furthermore, if you’re looking to launch a token or coin, you also need to do market research. This means determining your project’s feasibility by studying the current market scenario. Doing so allows you to identify the pain points or gaps in the market that your project will address.
From there, you’ll need to ensure that you have a minimum viable product (MVP) that’s currently being developed or ready to be deployed. Then, you’ll need to identify the best IEO launchpads for your needs. Some of the top IEO platforms include:
- Binance Launchpad
- KuCoin Spotlight
- OKEx Jumpstart
- Bittrex
- Huobi Prime
Choosing the right platform is crucial because it can influence the success of your project. This is primarily because the exchange will be responsible for administering the IEOs, from vetting to promotion.
Once you’ve selected the right platform, you’ll need to work on your whitepaper, which should be comprehensive and factual. Aside from the executive summary and business model, your whitepaper may include details like the project’s potential users and investors, tokenomics, market analysis, development strategy, marketing plan, growth forecast, fund distribution, and information about your team members.
You’ll also need to develop a well-designed and user-friendly website. Next comes the token development phase, where you need to decide the number of tokens you’ll be issuing, as well as how you’ll be measuring their value. A popular blockchain platform for creating tokens is Ethereum. Other top blockchain platforms for token development include EOS, Tron, Tezos, and Stellar.
It’s also important that you have clear funding goals to mitigate risks. To get started, you’ll need to identify what your maximum funding requirement will be. From there, you can proceed to minting your tokens and listing them on your preferred exchange platform. Note that platforms will vary in ruling, so it’s best to check their requirements first. Lastly, after the IEO, you’ll need to promote your project to gain more traction.
One important step to note is to review legal regulations surrounding IEOs. This is to prevent any hurdles during launching and later stages. Having a legal advisor will be beneficial to ensure that you meet all legal requirements and that your token is legitimate.
IEO white paper requirements
A well-written and well-researched whitepaper is vital to launching a successful IEO.
It should explain how the funding for the tokens will work, their backing sources, and the payment platforms that can be used with this new cryptocurrency. The whitepaper should discuss the new cryptocurrency’s expected value and the method of receiving funding for the cryptocurrency. Furthermore, it should show how the investors can benefit from the project and establish the crypto team’s credibility. Lastly, the whitepaper should have a legal disclaimer, which will protect both you and the investors. This should be drafted by a lawyer.
Once you’ve completed your whitepaper, it helps if you run it through a professional editor to ensure it’s error-free and factual.
How the verification process for IEO works
Cryptocurrency exchanges will typically do the following prior to launching the IEO:
- Examine the IEO’s white paper
- Review the company behind the token, including the team’s background
- Test the tech behind the token
- Find the token’s unique selling points
- Check the tokenomics
- Determine the initial exchange offering market demand for the token in the crypto landscape
Aside from evaluating the blockchain, the exchange platform will also perform checks on the initial exchange offering investors through measures such as Know Your Customer (KYC) and Anti-Money Laundering (AML). There will be full transparency throughout the duration of the project for both contributors and investors. IEO vs. ICO: What’s the difference?
While both IEO and ICO have the same goal, which is to present the initial offerings of a digital asset to raise funding, they’re two very distinct things.
Initial exchange offerings are fundraising events administered by cryptocurrency exchanges, which review the blockchain project’s whitepaper and other important components. Meanwhile, an initial coin offering (ICO) is administered by the companies themselves, thus eliminating intermediaries like crypto exchanges. An ICO enables these companies to establish a more direct connection between themselves and their investors.
Given that IEOs are managed by IEO platforms, the market may then be subject to follow trends that advocate centralization An ICO lets everyone participate regardless of their locations, while IEOs tend to be a bit more restrictive, limiting participation to exchange users. When it comes to transparency, IEOs offer more robust transparency and security, given those startups and exchanges both need to go through due diligence procedures, such as disclosing company information and reviewing the company’s whitepaper and background. Investors are also required to undergo measures like KYCs.
An ICO, on the other hand, doesn’t require startup teams to disclose all their company information, which may make it prone to fraud. According to the Wall Street Journal, investors funded hundreds of ICOs that were then identified by the WSJ as red flags, investing over $1 billion dollars into them. Up to $273 million worth of losses were reported by these investors.
Pros and cons of IEOs
Cryptocurrency exchanges manage IEOs, so they are held to higher standards. However, it still has its fair share of pros and cons those investors and token issuers should be aware of.
Advantages of IEOs
Initial exchange offerings have several advantages over an ICO, such as:
- Establishing the legitimacy of a blockchain project, given that it’s vetted by a third-party, specifically IEO platforms that essentially put their name on the line.
- Increased investor confidence in their cryptocurrency investment
- Providing a more streamlined experience for IEO companies and investors as said IEO platforms can offer support for the project’s marketing and development phase and can provide straightforward processes for companies to follow
- Making it easier for interested individuals to participate because they don’t need to go back and forth between wallets and blockchain platforms to manage transactions
- Giving the project greater visibility by letting the companies have access to an immediate audience
- Allowing cryptocurrency exchanges to provide project teams with access to legal resources and guidance
Exchanges may require token holders to use their tokens to participate in IEOs. Note that interested individuals who want to participate in IEOs may be required by exchanges to use their own tokens. Once you’ve gone through the preliminary IEO processes (registration, verification, and getting the native tokens), you can start purchasing digital assets through the IEO, which usually operates on a first-come, first-served basis.
Disadvantages of IEOs
While an IEO does have some significant advantages, it does have some drawbacks, including:
- Startup companies launching crypto projects will need to pay listing fees for the services given by the exchange, such as marketing, legal protection, and access to a trading platform, on top of being potentially charged for commissions by the cryptocurrency exchange.
- A crypto exchange may delist a project anytime.
- Companies will have less control over their project.
- Digital assets aren’t immune to “pump and dumps” or the sudden and artificial rise of value that will then collapse fairly quickly.
- Token issuers may also be susceptible to crypto exchanges that don’t do their due diligence.
- The project may have a limited number of participants, usually limited to investors willing to use the token’s exchange platform.
Conclusion
Initial exchange offerings are critical to successfully launching a blockchain project. IEOs benefit all parties involved, including cryptocurrency exchanges, token issuers, and investors. Crypto exchanges supervise initial exchange offerings, but you will still need to do your research. To ensure that your IEOs are successful, you’ll also need to proactively promote them through methods like community building and engagement, SEO, advertising your IEOs, and content marketing.
