IEOs provide investors with more safeguards

As recently covered by e27, Initial Exchange Offerings “IEOs” are now the hottest movement of the cryptocurrency fundraising landscape. These exchanged based crowdfunding campaigns are spreading very fast and Asian exchanges are leading the way based on both popularity and success.

According to the amount of IEO funds raised, 5 out of the 6 most successful platforms are based in Asia and have garnered interest from a global community of retail investors looking to capitalize on this new form of fundraising.

On an anecdotal level, inquiries from clients to conduct an IEO have skyrocketed in the past few weeks. This has given me the opportunity to deconstruct the pros and cons of IEOs and also how the process works from start to finish.

Despite different exchanges having different procedures and processes, one thing is for sure, IEOs are only becoming more popular. For example, the following screenshot is a new update from an exchange called Bitsdaq, reporting an estimated 100 new project applications in the past week. It is safe to assume larger exchanges such as Binance encounter even more interest.

1. Introducing buyer insurance

Beyond the obvious advantages of IEOs such as increased security and KYC optimization, there is a new trend that is worth mentioning – exchange insurance. Keep in mind IEOs provide a project with an exchange listing soon after the raise ends.

Platforms such as IDAX, a popular exchange that has successfully closed 10 IEOs, have started to reserve a portion of the funds raised in order to have a pool of funds ready for IEO investors in case an IEO does not perform well. The word “well” in this case does not refer to the amount of funds raised, as it is suspected that all IEOs on IDAX have been sold out, but the performance of the token once listed.

In the case of IDAX, it is reported that nearly 30 per cent of the funds that are raised are held in a reserve and released only after certain milestones are met after the first month of listing. This means investors have a safeguard against any kind of pump and dump or natural market decline that typically occurs after an IEO.

Let’s take a practical example. The next project to do an IEO on IDAX is a project called xCrypt which listed on May 24, 2019. If a contributor successfully completes registration on IDAX and contributes to the IEO, they will be entitled to a portion of their funds back in case of a market downturn or any other reason. This is something unique that was never provided by an ICO in the past.

As always, this is not meant to be financial advice and investing in any cryptocurrencies comes with risks. For new contributors, IEOs are definitely a safer alternative to ICOs since there is a centralized entity, in this case, an exchange, managing the process.

2. IEO costs and potential ROIs

IEOs are typically structured in split payments with a portion of the payments due upon successfully passing screening and signing a listing contract. Typically this is 50 per cent of the total listing fee and then the remaining 50 per cent due after the IEO is completed.

It is important to note that some platforms run IEOs quickly over the matter of a few hours or days, and others prefer to keep a running window that only closes after the IEO sells out or a longer designated time period is met.

I have found that the typical range of listing fees falls between 5 Bitcoin (BTC) and 20 Bitcoin (BTC). For larger and more popular exchanges, it is not uncommon for the exchanges to seek further incentives such as equity in a project or success fees.

Also Read: What is an ICO, STO and TSO?

One important distinction is that IEOs are typically smaller in scale than IEOs. Despite some ridiculously high raises such as Bitfinex’s US$1 Billion IEO, most offer a smaller allocation of their total token supply and seek to raise a more conservative figure.

In a more conservative scenario, a project would be investing somewhere around US$100- – 150,000 with a potential to 10x or 20x that capital investment. It is important to note that projects can do multiple IEOs with different exchanges and also raise privately prior. This creates a dynamic situation where the potential to go much higher than a 20x return is possible. Recent IEOs have raised as much as US$7-10 million.

Besides listing fees, there are also fees associated with marketing, obtaining legal opinions, company structuring, and other normal operational requirements.

3. Should you run an IEO?

This really comes down to personal and company preference. If you want to bypass lengthy traditional fundraising methods and have a project that is both legitimate and attractive, then an IEO could be a smart addition to your fundraising strategy.

Most of the bottlenecks I have seen with IEOs comes in the form of listing fees and bootstrapped founders struggling to find the upfront fees necessary.

One argument could be that these fees help filter complete scams or projects that are simply looking for a cash grab. The other side of the argument is that the exchanges are simply conducting cash grabs by increasing the fees and amount of IEOs being conducted.

Also Read: Japan plans to increase internal security in crypto exchanges

In my opinion, as long as there are retail and investor demand, IEOs will continue. We will likely see both an oversaturation of exchanges and projects soon. In an ideal world, these will both be filtered down to only include exchanges with real volume and transparency and projects with real use cases, teams, and products.

New strategies like setting performance benchmarks will make founders think twice about the discounts and tokens sold at the private sale level as well as come prepared with resources to ensure the project’s success post-launch on an exchange.

Overall, it will be interesting to keep an eye on the IEO phenomenon and see if it remains an important part of the cryptocurrency landscape or fades away.

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The post An inside look at the Initial Exchange Offering (IEO) appeared first on e27.