What is an IEO?
How is it different from an ICO or STO?
And what do all of these confusing acronyms mean?
Is this just another fad,
or should I really pay attention to it?
Well stick around,
in this episode of Crypto Whiteboard Tuesday
we’ll answer these questions and more.
Hi, I’m Nate Martin from 99Bitcoins.com
and welcome to Crypto Whiteboard Tuesday
where we take complex cryptocurrency topics,
break them down and translate them into plain English.
Before we begin
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when a new video comes out.
Today’s topic is Initial Exchange Offerings
or IEOs for short.
It seems like every other day a new acronym is born
in the crypto universe.
First we had initial coin offerings, ICOs;
then came Security Token Offerings, STOs;
and now we have IEOs.
Don’t worry,
the purpose of this video is to bring some clarity
to all of these confusing terms.
However, since we’ve already covered ICOs and STOs in previous videos
I strongly suggest you start by watching them
if you haven’t done so already.
ICOs, STOs and IEOs all have the same purpose -
they are all ways companies can use to raise funds for their projects.
ICOs were the first to come about.
With an ICO
the company raises funds by selling tokens directly to investors
at a discount.
These tokens can either have some sort of utility
in the company’s project
or represent an actual tradable asset like a share in the company.
ICOs are the wild west of fundraising.
They have no oversight, no regulation,
and in some cases are complete scams.
There are no rules for an ICO:
as long as you manage to get investors on board -
you’re good to go.
However, the lack of oversight
caught the attention of quite a few regulatory agencies,
causing them to crack down on many companies
who conducted ICOs.
This in turn gave rise to the STO.
You can think of an STO as a regulated ICO.
There are two main differences between an ICO and an STO:
First, STOs deal only with security tokens.
The tokens being sold represent a financial asset only.
ICOs, on the other hand,
can also sell utility tokens that are meant to be used
in order to power a specific platform.
The second difference is that STOs are fully regulated.
This means that STOs are compliant with government regulations
and are usually only offered to accredited investors.
This leaves a lot of people out of the STO game
since they just don’t have enough money
to be considered as accredited investors.
And now we come to IEOs.
IEOs are ICOs managed by a cryptocurrency exchange.
So instead of a company selling tokens directly to the public,
in an IEO
everything is done through an already existing trading platform.
Here’s how it works:
The company pays a listing fee
and gives some of its tokens to the exchange.
In return,
the exchange takes on
the responsibility of making the IEO succeed,
by taking care of the various aspects such as marketing, securing funds
and vetting investors.
The exchange then lists the IEO on its website
and the token sale is conducted through the exchange.
Once the IEO timeframe ends,
the tokens are immediately listed on the exchange for trading.
Here are some additional things you should know about IEOs:
Unlike ICOs,
IEOs usually aim to raise a moderate amount of money.
So you probably won’t be seeing any $150m IEOs.
Also, IEOs are usually classified as utility token offerings.
However,
due to the ambiguous nature of this classification,
most IEOs will probably not be available in the US
as exchanges fear regulatory clampdown
by the Securities and Exchange Commission.
Companies can conduct both an ICO and an IEO,
and many do.
Sometimes a company may conduct a private ICO for strategic partners
and high net worth individuals.
Later on, the token sale will move to an IEO for the general public.
Now let’s take a look at what advantages an IEO has
over an ICO or STO.
The first and most important advantage is increased trust.
Investors rely on the exchange to vet potential IEO projects,
and since the exchange’s reputation is on the line,
it has an incentive to do extensive due diligence
on each project that wishes to be listed.
This means the chance for dubious projects
or outright scams is reduced dramatically.
Second, IEOs are open to everyone who isn’t restricted
from using the exchange.
This opens up a whole market of investors
who otherwise wouldn’t meet the eligibility standards to participate
if a token sale were classified as an STO.
Another major advantage is security.
In the past,
ICO funds were lost due to hacks or theft.
With an IEO,
the exchange deals with securing investor funds
instead of inexperienced startups.
Additionally,
the company selling the token doesn’t need to worry about regulation.
The exchange is responsible for vetting its own users
and conducting KYC processes.
Probably one of the biggest advantages of an IEO
is token liquidity.
Once the IEO ends
people can start trading its tokens instantly on the exchange.
This eliminates what sometimes happens with ICOs
where you can’t find a marketplace to trade your newly received tokens.
And finally we have the marketing advantage.
The exchange can offer the IEO to its existing user base,
saving the company
the hassle of trying to build a prospect list from scratch .
IEOs are aimed to be a win-win-win situation
for exchanges, investors and companies seeking funds.
With an IEO,
each party can focus on
what’s necessary to reach its particular objectives.
The exchange deals with funds and regulation,
the company can focus on building its product,
and investors can feel safer
knowing that a reasonable amount of due diligence was done
for each project.
However, IEOs also have some downsides,
mainly for the companies issuing the tokens.
First, conducting an IEO costs money and in some cases quite a lot of it.
Sure, you can say this premium is an investment
for the marketing, security and regulation efforts you get
from an IEO,
but in the end not all companies can afford this.
Second, an IEO is limited to the exchange users.
Meaning if the exchange isn’t available in a specific country,
those people are automatically excluded from the IEO.
As IEOs become more popular,
exchanges have started to set up dedicated platforms for them.
For example,
the Binance Launchpad is a platform dedicated to conducting IEOs
on the popular cryptocurrency exchange Binance.
And as token sales become more mainstream and regulated
some people believe that IEOs are about to boom
just like ICOs did in late 2017.
Will this happen?
Only time will tell.
But I will say this - Beware of the hype.
You should do extensive research into each project
you consider investing in,
and never invest money that you can’t afford to lose.
The majority of tokens end up losing value
after their initial offering
and many projects don’t even see the light of day.
On top of that,
most of these projects don't even need their own token.
And if you’re not really clear on what I mean by that last statement,
you’ll want to take a look at our “What is Blockchain” video
to learn a bit more before starting to invest.
That’s it for today’s episode of Crypto Whiteboard Tuesday.
Hopefully by now you understand what IEOs
or Initial Exchange Offerings are -
A token sale that is managed by an exchange
rather than a company issuing its token directly.
You may still have some questions.
If so, just leave them in the comment section below.
And if you’re watching this video on YouTube,
and enjoy what you’ve seen,
don’t forget to hit the like button.
Then make sure to subscribe to the channel
and click that bell so that you’ll be notified
as soon as we post new episodes.
Thanks for joining me here at the Whiteboard.
For 99bitcoins.com, I’m Nate Martin,
and I’ll see you… in a bit.