The Initial Exchange Offering (IEO) is a token offering utilized by crypto projects to launch their tokens into the market. It is in the same league as Initial Coin Offerings and Initial DEX Offerings.
Initial Exchange Offerings allow crypto enthusiasts to access native tokens of various DeFi, NFT, and other blockchain-based platforms. People typically participate in token offerings because they want to purchase native tokens of projects they believe have high potential at lower costs before they go mainstream.
This article provides an in-depth analysis of IEOs and outlines what to expect.
What Is an IEO?
An IEO, or Initial Exchange Offering, is a fundraising method utilized by crypto projects or companies to raise funding for infrastructure development while offering native tokens to its investors via exchanges. Native tokens typically possess utilities, offering holders access to various functionalities available on the platform.
It differs from other token offerings in that the fundraising is done on a centralized exchange. An Initial DEX Offering is conducted on a decentralized exchange, while an Initial Coin Offering is often conducted by the crypto project itself and not by a third party.
In 2019, Binance pioneered the Initial Exchange Offering (IEO) with the launch of its Binance Launchpad. BitTorrent Tokens- BTT- was the first cryptocurrency project to use the launchpad platform, raising over $7.1 million in less than 20 minutes.
How does an IEO work?
Before an exchange permits a crypto project to utilize its launchpad to organize an IEO, several processes must be completed.
- It all starts with proposal submission. The cryptocurrency project applies to the exchange or launchpad, stating why they want to raise funds for their ecosystem.
- Once the application is received by the exchange, it is vetted to determine whether or not the proposal is authentic. They investigate the team’s history, tokenomics, use cases, roadmap, and other factors.
- If the exchange is convinced that they can host an IEO for the project following the vetting process, they sign a contract agreement detailing the rights and benefits of both parties.
Why Do People Participate in IEOs?
Initial Exchange Offerings (IEOs) are usually flooded with potential investors, especially if organized by a notable exchange or launchpad. There are a variety of reasons why crypto enthusiasts are interested in IEOs, some of which will be discussed below.
• Security features
IEOs are controlled by the centralized exchange that hosts them. People who use the Launchpad benefit from the exchange’s security features. Projects conducting Initial Exchange Offerings (IEOs) on the Binance Launchpad, for example, benefit from the crypto exchange’s security infrastructure.
Investors need not be worried about the process being hijacked, especially because the Launchpad is operated by a reputable exchange.
• Ease of collecting tokens
Investors that participate in an IEO can access a framework that allows them to collect their tokens during the Token Generation Event. The process of gaining access to their tokens is seamless.
• Simple procedure
Users follow a detailed procedure while participating in an IEO on a launchpad like Binance’s. Investors are aware of the steps required before they can access their tokens.
• Vetting process
Typically, crypto projects that employ launchpads for their IEOs may be subjected to a vetting process. This is done to minimize the risk of scam projects raising funds and then disappearing into thin air. Some exchanges offer customer protection features that provide clients with some degree of protection.
These exchanges typically include a department devoted to assessing the project’s potential, team information and history, project use cases, and much more. This could be more prevalent at major launchpads than at lesser-known ones.
• Immediate token listing
Tokens purchased in IEOs are often listed immediately after the event ends. For example, if a crypto project holds its Initial Coin Offering (IEO) event on Binance Launchpad, there is a significant chance that it will be listed on the Binance exchange after it ends. The same can be said for other Launchpads.
Typically, customers do not need to transfer their tokens from the launchpad to another platform in order to trade them because the exchange would list them instantly or shortly after the IEO.
Why Do Crypto Projects Use Initial Exchange Offerings?
Crypto projects benefit from organizing their IEOs on exchanges rather than opting for ICOs, even though the latter is usually less expensive. Projects typically pay more when organizing an IEO than when hosting an ICO. The following are some advantages of participating in an IEO as a fundraiser.
• Quick listing
When a crypto project organizes an IEO on an exchange, the native tokens of the project are usually listed on the exchange after the event. If an ICO is conducted, it could take months before utility tokens are tradable on centralized exchanges.
• Credibility
Participating in an IEO lends credence to cryptocurrency projects. Investors consider IEOs to be less risky than participating in an ICO. They claim that the cryptocurrency exchange hosting the IEO thoroughly vets the project and everything associated with it.
The credibility attached to the process can be extremely beneficial to crypto projects.
• Customer base
Cryptocurrency projects employ IEOs to raise funds and possibly gain popularity. This is made possible when a notable launchpad hosts the fundraising event. They may leverage the exchange’s massive customer base, increasing the number of users that subscribe to their utility tokens. This helps to increase the buzz around the project.
What Are The Disadvantages of Initial Exchange Offerings?
Though IEOs have their benefits, they have been criticized for different reasons.
• Gatekeeping
By organizing IEOs, untold power is given to the centralized exchange, as they have the authority to decide which crypto project participates in fundraising activities. This has advantages, but it also has disadvantages. Exchanges may reject a project for frivolous reasons, undermining their chances of accessing capital to finance their operations.
• Restrictive guidelines for cryptocurrency projects
Using a launchpad to host an IEO imposes some constraints on crypto projects. They must adhere to the launchpad’s guidelines, which may be restrictive. Typically, an exchange requires the project to pay a fee before raising funds. Aside from that, they may have to add some exchange team members to the advisory committee of their crypto projects. They may also be required to give the exchange a percentage of the supply of their native tokens. The rules differ based on the exchange hosting the IEO.
• Restrictive guidelines for investors
Investors must also adhere to the guidelines established by the launchpad. Users must have a certain amount of the crypto exchange’s native token before they can participate in the IEO.
Launchpads generally utilize a tier system to distribute the native tokens of the crypto project hosting an IEO. Investors must belong to a tier before they can participate in the IEO. Each tier has its eligibility criteria and a cap on the number of distributable tokens.
Are IEOs a Securities Offering?
Different countries have different perspectives on Initial Exchange Offerings. Some countries have few or no regulations governing the practice, but others are more proactive in their assessment of the event.
The United States Securities and Exchange Commission (SEC) has classified IEOs as securities offerings because “the offering may involve the offer and sale of securities. This means the IEO may be subject to registration requirements that apply to offerings under the federal securities laws. Among other things, registration means that the company offering the digital asset has to provide important disclosures about itself, its business, the digital asset offered, and the terms of the offering to investors.”
In Conclusion,
- An Initial Exchange Offering (IEO) is a technique used by cryptocurrency projects to raise capital.
- IEOs are considered less risky than Initial Coin Offerings.
- There are advantages for crypto projects and investors who participate in IEOs.
- The legality of IEOs differs from country to country.
- As always, conduct your due diligence before participating in IEOs.
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