The growing popularity and acceptability of cryptocurrency have increased over time as more businesses allow the use of coins for their transactions. However, in 2019, the Initial Coin Offering (ICO) has struggled in getting investors because of fraud, scams and legal issues. With this, startup companies looked for new approaches to raise funds. The Security Token Offering (STO) and Initial Exchange Offering (IEO) have been developed as new models of fundraising mechanism in the crypto market.
ICO vs. STO vs. IEO
What’s the difference between ICO, STO, and IEO? Let us compare the different fundraising models in the cryptocurrency space to know which is more secure, convenient and efficient.
What is ICO?
The ICO is a fundraising system to help startups raise funds for their project. Investors buy ICO tokens from the fundraising organization using cryptocurrencies such as Bitcoin and Ether. As the business grows, the value of the ICO tokens also increases. Investors need to ensure that they invest in a project that has the potential to succeed so they can also get high returns.
The ICO has three stages namely the private sale, presale, and the main sale. The earlier the investment, the higher the return. Thus most traders opt to invest during the private and presale period. However, for an individual investor, participating in the private or presale can be difficult that is why some join ICO pools.
In the ICO approach, the counterparty is the ICO company. This has created some risk on the part of investors as it is prone to scammers. If you are interested in investing in an ICO, you need to ensure that you have done your diligence to ensure that you are dealing with a legit company.
- Help fund promising projects. Startups will have an opportunity to realize their project
- Uses smart contract which is managed by the token issuer
- Doesn’t need unnecessary paperwork. You need the white paper which contains all information about the project such as what the project is about, the development team, the token information, and etc.
- Anybody can launch an ICO which some turned out to be scams and been presenting fake projects
- No general regulations
- Banned in some countries
- Big investors or called whales sometimes tend to manipulate the market
- The startup needs to reach out to a before ICO tokens will be listed
What is STO (Security Token Offering)?
The Security Token Offering (STO) is another fundraising approached in the crypto space. Security tokens represent the financial securities thus it is backed with tangible assets, company revenue, and profits. Unlike ICOs that sell tokens, STOs sell securities.
The STO uses an investment contract of underlying investment assets like real estate investment trusts (REIT), stocks, funds, and bonds. Unlike traditional stocks wherein the ownership information is on written documentation, the STO uses a blockchain to record and issues a token.
An STO is more challenging to organize compared to an ICO since the contract needs to be under the securities law and comply with relevant regulations. Only accredited investors can participate in STO, and that is only after they passed the set requirements.
- Low risk since it complies to security laws
- Backed with real-world assets, STOs are easy to assess
- Cheaper as it doesn’t need a middleman
- STO utilizes the smart contract
- Increased regulation in tracking ownership, Know Your Customer (KYC), Anti-Money Laundering (AML), exchange approvals, and etc.
- Amount of investment might be limited
What is IEO (Initial Exchange Offering)?
The Initial Coin Offering (ICO), is a form of crowdfunding which uses cryptocurrency to support valuable and essential projects. Unlike the ICO wherein the investor’s counterparty is the developer or the startup company, in the IEO the exchange acts as the counterparty. So basically, the exchange acts as the middle man between the developer and the investor.
The token launching, selling and distribution all take place in the exchange platform. The token issuers need to pay for the listing fee and a percentage from the tokens sold. In return, the exchange will help in the startup’s marketing operations. The IEO has captured the interest of project teams, investors and exchanges with its secured and hassle-free transactions.
The IEO doesn’t use a smart contract, but investors need to have an account with the exchange since the IEO token sale is only for the exchange’s registered users. Different trading platforms already conduct IEOs such as Binance and Bittrex.
The history of IEO startups looked for a new model or approach of fundraising. As there are countries that banned ICOs like China, project developers looked for an alternative to raise funds without breaking the laws.
- Easy access to potential investor’s base
- Easier token distribution
- Investors have gone through the KYC and AML process
- Backed by research conducted by the exchange. The exchange screens the fundraising company before it can raise funds in its platform
- Promoted by the exchange, so it requires a low marketing budget from the startup
- Immediately listed on the crypto exchange after the IEO
- Investors have the assurance that the project is not a scam
- Uses smart contract which is managed by the exchange
- The IEO will be limited to a specific exchange, so investors who want to participate need to create an account with the exchange
- Requires KYC which may be inconvenient for some investors
- Exchanges will get a cut from the token sales
- Fundraising company needs to pay for the listing fee
- Issued tokens are limited
Difference of ICO and IEO Explained
Most new investors ask if what is the difference between ICO and IEO. Here’s the explanation on the blockchain-based fundraising ICO vs IEO.
- Fundraising Platform. In an ICO, the fundraising is conducted on the token issuer’s website. Whereas in an IEO, it is done in the crypto exchange’s platform.
- Counterparty. In an ICO, the crowdsale counterparty is the project’s developer while in IEO, it will be the exchange. So the exchange acts as the middleman in an IEO.
- Smart Contract. In an ICO, the project developer manages the smart contact. However, in an IEO it is managed by the cryptocurrency exchange.
- AML/KYC. In an ICO, the AML/KYC varies depending on the ICO. In an IEO, the exchange conducts the AML/KYC on all its users; thus, providing a high level of security to its users. With verified users, it will be easier for the exchange and ICO token issuer to determine users who act maliciously.
- Marketing. For an ICO, the marketing budget is significantly high since the startup needs to do all the marketing strategy. The ICO startup needs to invest in getting the public’s attention. For an IEO, the marketing budget is relatively low since the exchange markets the ICO tokens.
- Screening. In an ICO, anybody can launch a crowdsale as long as it is legal in a country. This is the biggest problem of an ICO since there is no third-party to monitor if an ICO is legit or an ICO scam. Basically, launching an ICO requires only a white paper to convince its investors. However, in IEO, the exchange conducts due diligence before the fundraising company can utilize its platform. The screening is done to ensure that the project is legit and has the potential to succeed. Of course, the exchange also wants to maintain an excellent reputation to its users.
- Token Listing. In an ICO, the ICO needs to reach out to the crypto exchange before the token will be listed after the crowdsale. However, the token is automatically listed in an IEO on the exchange where it is conducted.
Why Choose IEO (Initial Exchange Offering)?
Why is the Initial Exchange Offering preferable than the other models of digital fundraising? Here are some of the reasons why IEO is the ideal fundraising approach.
Requires only one KYC/AML process for the projects listed on the exchange unlike the other models wherein investors need to go through the KYC and AML for each project that an investor is interested in.
Investors will have a peace of mind knowing that they invested in an IEO which have already been screened by the exchange. Raising funds through the exchange platform eliminates scams and fraudulent projects. Tokens can already be purchased from the exchange so it will be difficult to scam the investors. Exchanges conduct their survey on the project. Thus, investors are confident that the project is worthy of their investment.
IEO offers improved transparency compared to the other approaches.
The crypto exchange manages the smart contract and handles the KYC/AML process. The relative security is guaranteed to its investors thus, creating a safer crypto environment. Also, it reduces the risk of sending the crypto to the incorrect wallet address.
IEO is easier for a startup company since the token offering will be launch on the exchange’s platform. Although the token issuer needs to pay for the listing fee, it is much cheaper compared to an ICO wherein the token issuers need to do everything. In an IEO, the exchange does the marketing, and the fundraisers can benefit from the new user base of the exchange. Exchanges already have a user base for their existing user so it will be easier to connect with the users for IEO contributions.
The token will automatically be listed on the exchange’s platform after the main sale so need to wait for it to be listed.
The approach of this model can benefit even those who are new in trading and not just the whales of the crypto space.
Success of Ended IEOs
The Initial Exchange Offering offers promising results, however not consistent yet. See below:
And here are some statistics on the success of the ended IEOs:
- 7 seconds – Length of time for MultiVac raised $3.6 million. And four day to reached $16.2 million.
- 10 seconds – Length of time VeriBlock raised $7 million on Bittrex Launchpad.
- 22 seconds – Lenght of time Fetch Al raised $ 6 million on Binance Launchpad.
- 18 minutes – Length of time BitTorrent raised $7.2 million on BInance Launchpad.
- 3.6 – Average rating of IEO projects listed on ICObench.
- 5- Number of projects that raised most amount of funds. Percival – $ 35 million, Bread – $ 32 million, Chars – $ 30 million, GIFTO – $30 million; and ioeX – $ 27.2 million.
- 50+ – Current number of IEO projects on ICObench.
- $ 5.1 million – Amount raised by 11 IEOs projects of Exmarkets Launchpad which are listed through Exmarkets on ICObench.
- $ 57.8 million – Amount of funds Singapore raised on its 11 IEO projects listed in ICObench
- $ 79 million – Amount raised by IEOs on Binance Launchpad.
- $ 180 million – Amount raised in 23 IEO projects based on IEO Bloomberg citing the CoinSchedule.com crypto tracker.
- $ 235 million – Total amount raised by all ended IEO projects according to the date from ICObench.
Initial Exchange Offering (IEO) Latest News
Here are some of the latest news about the Initial Exchange Offering
- Bibox – On April 22, Bibox launched its IEO platform known as Bibox Orbit. It aims to excavate and boost the launch and development of high-quality decentralized projects.
- Gate.io – Gate is raising funds to finance its project through the distribution of Gatechain Tokens (GT). Although there is no token yet, they are offering Gate.io POINTs which can be exchange to GT to utmost 2.5:1.
- IDAX – Users of IDAX (idax.pro) can participate in the AliensCoin (ALS) project’s token sale. The AlienCloud created a platform for traders, investors, and miners. The functionality of the AlienCloud includes crypto exchange, IEO launchpad, Cloud mining, mobile applications, contests for traders, crypto indexes (beta), and payment from bank cards.
- Binance – According to Changpeng Zhao, the founder and CEO of Binance, that although IEOs can benefit from the exchange doing the due diligence, the issue with regulatory compliance will still be there for both IEO and ICO.
- Bittrex – Bittrex has canceled its first token sale which they planned to be hosted by their Malta-based counterpart on March 15. The IEO of RAID project was canceled after OP.GG, a gaming analytics company terminated their partnership with South Korea’s RAID.
How to Participate in IEO
Participating in an Initial Exchange Offering is entirely different on how an investor can participate in an ICO. With the obvious reason that the counterparty is now the exchange and not the development team. Here is a guide on how you can participate in an IEO.
Look for an IEO
Look for a project that will conduct an IEO. This is usually announced on the exchange’s website or the project’s website. Research and analyze the IEOs. Look for the IEO that interest you. Make sure to go through their whitepaper to understand what the IEO is about, the team behind the project, and token information.
Find an Exchange
Find an exchange that will host the crowdsale. This shouldn’t be difficult since you can get this information in the crypto community.
Create an account
Register to the exchange by creating an account. Then complete the verification process through completing the Know Your Customer (KYC) and Anti-Money Laundering (AML) process.
Fund your Account
Fund your exchange account with the cryptocurrency accepted for the crowdsale.
Wait for IEO Launching
Find out the date of the IEO launching and buy the tokens from the exchange once the IEO commences.
How to Choose the Best IEO Platform
The key to a successful investment in the Initial Exchange Offering is choosing the right exchange platform. Remember, exchanges already did their diligence before an IEO is launch on their platform.
So here are the things you need to consider in choosing the right trading platform:
Where is the exchange located? The laws of regulations of exchanges vary from country to country and may change dramatically. Hence, it is more advisable to choose an exchange based on your own country (since crypto is global this is not always possible)
Is the exchange platform easy to use? The IEO platform should be easy to use. The dashboard or the user interface must be easy to understand and navigate.
How secure is the exchange? Determine the security of the platform. Make sure that it uses a high level of protection. Check their website. The website must be using https which means its secured. Don’t consider exchanges which only have http. Make sure that it has a secure login and two-step verification.
How quickly will you receive your currency? Exchange rates should be set automatically to prevent any complaints from users.
How much is the exchange fee? Exchanges have different exchange fees so check out if the fee is reasonable and not overpriced compared to the fees of other exchanges.
What modes of payment are accepted? The IEO platform must be able to take various cryptocurrencies, credit card, and debit card for a smoother transaction. This is very important especially if you are trading multiple currencies. Also, this will ensure that the modes of payment will be convenient for you.
Are your identify information secured? Ensure that the exchange strictly follow the KYC and AML laws in your country
Does the exchange have a good reputation? Check out others’ feedback and reviews about the exchange.
The Initial Exchange Offering is becoming more popular and has caught the interest of many traders, exchanges and project teams. With the risk post by ICO, the IEO has become an ideal model in the cryptocurrency industry. Although IEO is a new phenomenon, it is likely to be the future of digital fundraising. Most investors opt for IEO than ICO because of its centralized security and monitoring. They feel that IEO best serve their interest.
The IEO makes the cryptocurrency more appealing to a broader audience. Some have expressed concern that IEO might have a strict approach, but most are confident in investing in IEO as it offers a more secure and efficient way for both investors and startup.
Also, the benefits that IEO significantly outweigh its disadvantages making it more preferable model by both startup and investors.
Indeed the Initial Exchange Offering model is promising, but it is not available to the public. Thus, only the users of the hosting exchange can participate in the token sale. Most fundraising companies choose an IEO because they can save on the marketing budget and can have easy access to registered users.
With the extra protection from frauds and scams, there is no doubt that an IEO is a good blockchain-based fundraising model. However, what if there’s a platform specifically designed to bridge the gap between ICOs and investors, and offer some of the benefits you can get from an IEO? After all, there are plenty of successful ICOs that only have the white paper, website, a team with strong credentials, and advisors that are well-known in the finance, tech and crypto sectors. Well, that will be great, right? Say hello to ICOpicker!
One of the benefits you can get from an IEO is its credibility since the exchange already conducted their due diligence to ensure that the token issuer is legit and the project has the potential to succeed. In ICOpicker, the selection, grading, and analysis of an ICO are done through crowdsourcing. Members of ICOpicker can rate the potential of the ICOs, and they have the freedom to share their opinions and analysis on each ICO unlike in the IEO wherein it is only base on their due diligence.
In ICOpicker, the startup can also have the capability to reach a broader audience like the IEO. ICOpicker has registered members on their platform so the startup can use this an advantage to market their ICOs. This is a better marketing strategy compared to an IEO wherein the project’s reach is limited to the exchange’s registered users.
Security is a top priority of every investor, and the ICOpicker’s platform uses a high-level type of security to ensure that all user information is kept safe. The website uses https and two-step verification.
Another edge of an IEO is that it helps in the marketing strategy of the startup. However, before the startup can launch an IEO, they need to pay for the listing fee and a percentage on their token sales. Well, marketing is a natural thing in ICOpicker since ICOs are listed on the website, it is rated, and promoted by the members.
Do you think the Initial Exchange Offering (IEO) has a potential in the crypto market? Be an ICOpicker member and enjoy some of the benefits of an IEO while investing in an ICO.