1.1 An initial exchange offering(“IEO”) is a crowdfunding mechanism which, for the large part is similar to an initial coin offering (“ICO”) but for certain reasons is considered an improvement over it. Prime amongst these is that an exchange serves as a trusted intermediary between the token sellers and the buyers. This means that the exchange undertakes its due diligence with regards to the viability and authenticity of the offering before opening it up to buyers. Other benefits are discussed later in this article.
1.2 One must appreciate the value that this creates for the token buyers. A 2018 study prepared by ICO advisory firm Statis Group revealed that more than 80 per cent of ICOs conducted in 2017 were identified as scams. They also found that four per cent of ICOs failed, and three per cent had “gone dead”. As a result, potential token buyers were discouraged from entering the ecosystem. Exchanges are best placed to address this lacuna since they have a natural commercial interest in ensuring that the offerings listed on their exchange are authentic, else they lose credibility. The added benefit is the ease of accessing these tokens through exchanges since the need for using multiple digital wallets is obviated. More on this below in this document.
1.3 In exchange for these services, the token offerors have to pay a listing fee along with a percentage of the proceeds from the sale of tokens during the IEO. After the tokens are sold on the exchange’s platforms, their tokens are listed on the exchange.
2. THE EMERGENCE OF IEOs OVER ICOs
2.1 An increasing number of cryptocurrency exchanges started to embrace IEOs. One of the first was Binance, which launched its IEO platform Binance Launchpad. BitTorrent initiated a token sale on Binance Launchpad and raised USD 7.2 million in less than 15 minutes, hitting the crowdsale hardcap. The second IEO on Binance Launchpad, Fetch.AI, hit the hard cap of USD 6 million in just 22 seconds. After observing the success of Binance Launchpad, other notable exchanges announced launches of their own IEO platforms. Among the IEO platforms are Bitmax Launchpad, Bittrex IEO, OK Jumpstart (OKEx), KuCoin Spotlight, and Huobi Prime. Matic Network, that we advised, recently conducted its IEO on Binance and raised USD 5 million selling 19 percent of its total token supply.
3. ADVANTAGES OF IEOs
3.1 Exchange listing: If undertaken without IEOs, exchanges have very tight listing requirements that could take months to fulfil. On the other hand, if an exchange participates in the project’s IEO, then listing becomes much easier since the offering has already been vetted by the exchange, obviating the need for tight listing procedures.
3.2 Access to the exchange’s user base: Choosing an exchange for an IEO means that the project will gain access to the exchange’s existing user base. This decreases marketing costs since big exchanges have a user base far greater than most cryptocurrency marketing campaigns can reach.
3.3 Credibility: Projects that undertake IEOs have increased credibility because buyers are assured that the exchange has undertaken the necessary due diligence with respect to the offering. Therefore, one is assured that the exchange will proactively detect and curb any scamming or phishing attempts.
3.4 Price manipulation: An IEO also helps maintain price stability to some extent. In the case of an ICO, the token is vulnerable to price volatility because those who bought cheap tokens in the pre-sale may sell them immediately for quick profits. These actions start a downward spiral in the value of the tokens.
4. BENEFITS OF THE EXCHANGE
4.1 Marketing: Exchanges join forces with the project’s marketing team to market the token. This leads to increased expertise, experience and marketing wins.
4.2 New users and increased trading volumes: Exchanges benefit greatly from the volume of new users since they stand to earn a lot in terms of trading fees and also benefit from greater deposits made by these investors.
4.3 Fees: Exchanges benefit from fees accumulated through IEOs. Different exchanges may charge different kinds of fees, including listing fees, expenses/operations fees, or IEO fees. They may even charge a percentage of profits or a fee in the form of tokens.
5.1 ICOs created a fundraising boom in 2017 and 2018. However, a significant percentage of the crypto projects were operated by scammers or were of a dubious nature. For example, Confido, a cryptocurrency start-up that raised USD 375,000 through an ICO, disappeared with the money without fulfilling any investor obligations. Because of this, as well as ICO bans, we can say that there is substantial room for improvement in the cryptocurrency-based fundraising ecosystem, especially from a consumer safety point-of-view. IEOs enhance such safety since they actively participate in the process and safeguard the investors through their due diligence. We believe that regulators should take cognizance of the inherent safeguards and accountability that IEOs bring with them, which may even contribute to alleviating some of their concerns. With proper regulatory support, IEOs have the potential to become the standard model for raising funds in the crypto space and may even create the next fundraising boom.
(Authored by Muhammad Mahatab, a third-year student of Chanakya National Law University, Patna, during his internship with Ikigai Law with inputs from Ratul Roshan, Associate at Ikigai Law)