This artiсle explains what IEO is, how to organize it for a startup. It also tells about IEO’s pros and cons based on experts’ opinion.
After the rise of ICO in 2017 and the rapid drop in the second half of 2018, investors are asking questions related to crowdfunding and regulatory future of ICO. Unfortunately, the obscurity and ease of fundraising with altcoin mania in late 2017 showed that almost 80% of ICOs were scams. Due to it regulatory bodies had to take immediate action and they revealed that there were some decisive outlines on different tokens. Issues with legal status of tokens were also identified.
To control this situation US regulatory body SEC introduced Crypto Token Framework. However, it led to various issues and unanswered questions which require further discussion. In 2019 ICO has evolved into IEO, which stands for Initial Exchange Offering and was introduced to startups as a new hot trend of raising funds.
Today many people say that IEO is an “evolution of ICO”, predicting a great future for it. However, after all the pitfalls of ICO concept, the blind belief that IEO will become a common model for startup fundraising in future, with the ability to create the next fundraising boom in crypto space would be too naive. While some popular media sources became super positive about IEO, we at InnMind found quite sceptical views among the industry experts. But let’s go step by step and learn more about this current trend in crypto fundraising.
What is IEO (Initial Exchange Offering)
The Initial Exchange Offering as identified by its name is managed on a cryptocurrency exchange platform. Unlike ICO, in IEO fundraising process is administered by the crypto exchange on behalf of a startup which is planning to raise funds using newly issued tokens.
Token sale is conducted through an exchange platform. Issuer of the token will have to pay a listing fee and an interest from a number of tokens sold during an IEO.
Apart from that, tokens developed by a crypto startup will be sold on various exchange platforms and their new coins will be listed once the IEO is over. As a cryptocurrency exchange receives a fee from tokens which have been sold by the startup, it is incentivized to help with the marketing and market making operations.
Difference between IEO and ICO
There are many people who want to know why IEO is better than ICO (if it is really). Here we have some facts to explain you the difference.
- Participants of IEO will not send smart contracts to their contributors, which is a commonly-used practice in ICO management. Instead, they will create an account using exchange platform on which IEO is managed. After that, the contributors are able to fund their exchange wallets with crypto coins. They can use these funds to buy tokens of different fundraising companies.
- IEO is meant to make fundraising more difficult for scam projects, because the crypto exchange which executes the IEO is incentivized to make a deep due diligence of the project before accepting its token for sale.
- In comparison with ICO, investors in IEO are considered to have lower risk and more flexibility and speed for exit. They can start trading tokens of the project immediately after IEO ends.
- To obtain contributions for IEO startup, it is much easier for a startup to tap on the existing user base of crypto exchange, then relying only on own network and marketing efforts to attract investors.
- During an ICO campaign KYC and AML procedures were organised by a startup itself (or external service providers). With an IEO case, the crypto exchange is executing KYC/AML, which removes a huge headache for startup founders.
- Any crowdfunding event marketing campaign is essentially important and requires a lot of resources from a startup. In ICO case the responsibility for the marketing tasks is fully on a startup, though in IEO a significant part of marketing is organised by the exchange, which is motivated to launch and execute a successful crowdfunding process.
How to organize IEO for startup fundraising
There are many startups who are using IEO instead of ICO nowadays. However, there is a complex process that people have to follow to assure they can organize successful fundraising for a startup. If you are planning to organize IEO for fundraising here we have a complete guideline that you will have to follow.
- Among general recommendations, which are always valid: you should have a strong business model, complete core team with experienced and reputable advisors, breakthrough tech solution and clear business use cases. That is what both exchanges and investors are looking for (while preparing this article we were talking with listing teams of major exchanges and they all paid attention to these general recommendations). And of course before launching your tokens make sure that you already have an MVP or a working product.
- Decide on your initial token price and hard / soft cap with a clear and understandable reasoning. Keep in mind that tokens can be sold in combined rounds, so your calculations of tokenomics should be reflect which part will be sold via IEO and what parts will be allocated for private and public rounds. While preparing for IEO don’t forget that participants will be able to buy as many tokens as they want and start trading immediately (maximum a few days after the IEO event).
- Choose the exchange platform where you will launch the token sale. Among those crypto exchanges, who are already doing IEOs, there are: Binance, ABCC, OKEX, ProBit, Bittrex, BitMax, ExMarkets, Latoken, ZB, ZBG, BitMart, EXMO and many others. You may find here the topic of BitcoinTalk with the List of IEO (Initial Exchange Offering) platforms and profit statistics.
- There are no standard conditions of exchanges for IEO. Some of them charge the interest (a certain percentage of tokens sold), others also require listing fee (which can be quite high: a few hundred thousands of dollars or 15–20BTC). Some exchanges even put as the condition that the part of the funds collected during the IEO remains on the exchange for some period of time for market making procedures. Collect and analyse offerings of each of them before making a decision, especially paying attention to additional fees and charges, as well as the procedure of receiving funds after the IEO.
- Some exchanges may ask for legal opinion, to be sure that the project’s token is a utility. While negotiating with exchange, ask in advance if it has its own specific requirements for legal opinion.
- Fill up the orderbook of your token and follow the self-listing process.
- Make sure that you create a token logo and name that will be used in marketing of your startup.
- Sounds obvious, but still some founders forget that you must have a well-designed informative website with all information related to the tokens. It should include whitepaper, token economic analysis, technical papers and other legal documents which are necessary. Don’t forget to describe your team, advisors, roadmap and current achievements (i.e. strategic partnerships, business development milestones, first sales, etc.).
The example of successful IEO is company AIVIA, one of the premium startups on InnMind: 80M AIV tokens were sold in under 21 minutes through IEO!
AIVIA’s solution is an open investment ecosystem that allows investors, fund managers, privately held businesses and startups to interact utilizing smart contracts on a peer-to-peer basis and without intermediaries.
Now AIVIA is listed on ABCC Exchange from April, 25th. Read here to learn more about AIVIA and trading.
Pros and Cons: experts’ opinion
Follow the link to learn experts’ opinion: IEO (Initial Exchange Offering) review: pitfalls and advantages