Initial Exchange Offering (IEO) Explained

By RelyOnCrypto | | 26 Apr 2021

Every second day, it appears, a new acronym emerges in the crypto universe. We've got Initial Coin Offerings (ICOs), Security Token Offerings (STOs), and now Initial Exchange Offerings (IEOs). The aim of ICOs, STOs, and IEOs is the same: they are both ways for companies to collect funds for their projects.

Initial Coin Offerings (ICOs) were the first to appear. An ICO is a way for a company to collect money by offering tokens to investors at a discount. These tokens may signify an actual tradable asset, such as a stake of the company, or they may provide some use in the company's project. Initial Coin Offerings (ICOs) are unregulated, unsupervised, and in some situations, outright scams. An ICO has no set of rules; as long as you can attract investors, you're good to go. The lack of regulation, on the other hand, drew the attention of a number of regulatory agencies, prompting them to impose restrictions on several companies that performed ICOs.

As a result, the STO was born. An STO can be thought of as a controlled ICO. For an ICO and a STO, there are two major distinctions. STOs, only sell security tokens, which represent a financial asset; ICOs, on the other hand, sell utility tokens that are used to run a certain network. The second distinction is that STOs are fully supervised, which ensures they adhere to government laws and are usually only available to approved investors. This excludes a large number of individuals from participating in STOs because they lack the financial means to be considered qualified investors.

Now we'll talk about IEOs. IEOs are ICOs that are run through a cryptocurrency exchange, but instead of a company selling tokens directly to the public, everything happens through an internal trading platform through an IEO. Here's how it works: the corporation pays a listing fee and in exchange gives the exchange some of its tokens. The exchange assumes responsibility for ensuring the IEO's success by handling different issues such as marketing, funding, and investor screening. The exchange then publishes the IEO on its website and conducts the token selling from it. The tokens are automatically listed on the market for trading after the IEO period has ended.

Unlike ICOs, IEOs usually seek to collect a moderate sum of capital, but don't expect to see any IEOs worth $150 million. IEOs are most often referred to as utility token offerings. However, most IEOs will likely not be eligible in the United States due to the unclear existence of this classification, as exchanges expect enforcement action by the Securities and Exchange Commission. Many businesses carry out both an ICO and an IEO. A private ICO may be held by the company on occasion for strategic partners and high-net-worth investors. Later on, the token sale will be replaced by an IEO open to the general public.

The first and most important advantage of an IEO over an ICO or STO is the improved confidence investors place in the exchange to vet future IEO projects. And, since the exchange's reputation is on the table, each project that wants to be included has an obligation to undergo extensive due diligence. As a result, the likelihood of dubious projects or outright scams is greatly diminished. Second, someone who isn't restricted from using the exchange will participate in IEOs. This opens up a whole new market of investors that would otherwise be unable to partake in a token sale if it were known as a STO.

Another advantage is security. ICO funds were lost in the past due to hacking or theft; but, with an IEO, the exchange is concerned with protecting investor funds rather than novice startups. Furthermore, the company distributing the token is not subject to regulation. The exchange is in charge of vetting and running KYC procedures for its own members. Token liquidity is perhaps one of the greatest benefits of an IEO. People will start exchanging the tokens on the exchange immediately after the IEO ends. This avoids the situation where you can't find a platform to exchange your newly acquired tokens, as can happen with ICOs.

Finally, we have the advantage of marketing. The IEO will be offered to the exchange's current customer base, saving the business the time and effort of having to build a prospect list from scratch. IEOs was designed to be a win-win situation for exchanges, customers, and companies looking to raise capital. In an IEO, each group will concentrate on what it takes to achieve its specific goals. The exchange handles funds and legislation, allowing the company to concentrate on developing its project while customers can be assured that each project has undergone a fair amount of due diligence.

IEOs, on the other hand, have certain drawbacks, mostly for the companies selling the tokens. First and foremost, conducting an IEO costs money, and in certain cases, a significant amount of it. You could argue that this premium is a return on investment for the marketing security and regulation activities provided by an IEO, but not every company can afford it. Second, an IEO is only open to exchange members, which means that if the exchange isn't active in a certain region, certain individuals are immediately excluded.

As the popularity of IEOs has grown, popular exchanges have begun to create dedicated platforms for them. The Binance Launchpad, for example, is a platform devoted to executing IEOs on the famous cryptocurrency exchange Binance, and as token sales become more common and controlled, some say they are about to skyrocket, similar to how ICOs did in late 2017. However, be cautious of the hype; you should do thorough analysis on any project you are considering investing in, and you should never spend funds you cannot afford to lose. After their initial offering, the majority of tokens lose value, and certain projects never see the light of day.

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