Here is everything you need to know about IPO lockups – what IPO lockups are, why they are crucial, and the typical exceptions to ...
As Initial Exchange Offerings (IEO) started to gain traction sometimes causing some confusion within crypto space, we decided to create this comprehensive guide and take a look at the key features of this crowdfunding strategy.
The nascent crypto market has brought with it several investment opportunities and ways to raise funds. Since 2013, over 1500 Initial Coin Offerings (ICOs) have taken place. This crowdfunding strategy took the top spot for crowdfunding projects until issues of fraud and exit scams started coming in.
China’s late 2017 ICO ban and several other governments creating regulations for the new market has slowed these cryptocurrency funds to a trickle.
Due to the scams, many people have lost faith in the cryptocurrencies reducing their rate of adoption. While the ICO funding method is fading away, a new fundraising frenzy is building momentum. Speculators and fundraisers are marveled by the initial exchange offering (IEO). The IEO is a transformation of the ICO.
The IEO is majorly based on the ICO but it is safer since the offering is done via local exchanges that bear reputational risk in case of any scams.
An Initial Exchange Offering is a crowdfunding strategy that relies on an exchange or multiple exchanges. The third party exchanges make the smart contract, event planning, and some of the marketing campaigns. In the ICO, it is the developer that ensures the smart contract is correct and everything is conducted as planned.
Hence, investors must create an account with the exchanges to participate in the IEOs.
The investors send their digital tokens to the exchange account instead of contributing them to the Smart Contract in the case of ICOs. When the IEO starts, the investors can purchase crypto from the participating exchange. The tokens are ‘minted’ by the developers before the IEO and sent to the exchanges.
Every project has different deals, terms, and conditions with the exchanges. The terms could be a flat fee, a percentage for the exchange, marketing expenses or other conditions. Nonetheless, the project investment can reduce some of the marketing, organizational or security expenses and turn into a great investment in the long term.
Many ICO rules are viable with the IEOs but the deals and conditions vary depending on the project at hand. Some projects demand a fixed token price throughout the IEO process. They may also demand a token cap per investor to eliminate whales and chances of price manipulation. These rigid measures are mostly set to regulate the process.
Exchanges need developers to set a hard cap and a soft cap to all their projects to enable a greater result of the IEO. If too many coins are on offer, the token economy is doomed from the start. IEOs are not open to the general public. Thus, only active users of the participating exchange can participate.
Before any exchange oversees a token sale on their platform, it is mandatory for them to reach an agreement with the project developers. The exchange then conducts a thorough and extensive review of the project using various conditions that authenticate the worthiness of the IEO.
Once the exchange is satisfied and accepts the project, they will announce the date for the token sale and a fixed price per token.
All IEO participants must have active and funded account wallets on the exchange platform. Binance Launchpad is popular among IEOs with a featured project raising a staggering $5.5 million in 18 minutes.
The cryptocurrency exchanges are strongly incentivized to scrutinize the token issuer and the quality of the offering due to the involved reputational risk. As a result of that, the IEO exchanges develop a fiduciary relationship with the investors since they do what the institutional investors traditionally extensively invest in.
Hence, in the IEOs there is a great deal of trust since the developer partners with trusted exchanges. Thus, the IEOs acquire much-needed credibility. Binance has built a trusted name for itself in the crypto world since its launch in 2017. Bittrex Exchange cancelled an IEO for the RAID project after discovering that they were somewhat a fraud.
Therefore, it shows that the exchanges prioritize users’ safety over profits. Exchanges are not ready to aid scams since it will punch holes into their reputation. IEOs are user-friendly since investors only need to create an account at the particular exchange, fund their wallets and purchase tokens once it goes live.
Participating in an IEO is significantly easy. Users need to first check if an IEO will be on offer. Once they find a viable project, they need to research which exchange will participate and sign up on the exchange.
They will also need to acquire the cryptocurrency that will be accepted by the IEO and then wait for the crowdfunding event to start. Once it goes live, users can buy their desired amount of tokens.
Whether the IEO is a trend or is here to replace the ICO, only time will tell. Binance’s experiences point towards the fact that the new funding strategy has immense potential and may take the crypto industry by storm. Several success stories have come up with Fetch and BitTorrent IEOs selling out within seconds.
With many leading exchange platforms starting to launch IEO products, all indicators point towards an evolution of how crypto projects raise funds. The new model has potential and may help may crypto projects get necessary funds provided that the exchanges are diligent in their roles.
However, users should always take caution and do thorough research before investing in any project despite how secure or trustworthy it may appear.