ICO’s or “initial coin offerings” were the fundraising avenue of choice for blockchain technology startup projects in 2017 and most of 2018. ICO’s provided a simple and effective path to funding for DAPP developers launching new projects—but this path of financial fundraising success also opened the door to a tremendous amount of fraudulent activity. An unprecedented amount of money was invested in ICOs – over $20 Billion raised since 2017. That success was met with an equally unprecedented number of scams. A study conducted by Satis Group determined that approximately 80% of ICO projects are scams.
Many hoped the rising popularity of Security Tokens (also known as digital securities and or programmable securities) in 2018 and 2019 would bring much needed legitimacy to the industry. An exciting addition to the token environment because they counter many of the negative drawbacks of ICOs. Security tokens holders can be granted ownership rights or shares of a company; in a sense, a traditional initial public offering (IPO), built and executed on top of blockchain technology. Claiming to be a regulated STO does not necessarily mean that the project in question is a regulated STO and does not necessarily make it an investment worthy project. As with ICO’s many projects use the proper lingo along with a well written white paper and beautifully designed website to sell a ‘blockchain built bill of goods’.
Crypto Winter wiped a lot of projects, both good and bad, out. Many in the industry were happy to see this happen; the space was getting a bad reputation from all the scams and poorly managed projects that were taking investors money and closing up shop but as the market recovers ICO’s in various forms are launching in considerable numbers once again.
Initial Exchange Offerings – IEO’s
During an ICO crowdfunding sale, a project will typically announce when the tokens will make their way to a cryptocurrency exchange so token holders can start trading and getting a return on their investment. The exchange(s) the token gets listed on depend on the project and how much money was raised. Getting on an exchange costs money and that is it. I have known of projects barely out of the gate getting guarantees from exchanges to list as long as they pay the listing fee.
An Initial Exchange Offering is an ICO run through a cryptocurrency exchange therefore removing the uncertainty of an exchange listing a token after its sale. The token is sold exclusively to the users of that cryptocurrency exchange as opposed to the general public with an ICO.
IEO’s have started to generate a lot of buzz due to the recent success of BitTorrent’s token sale on Binance’s Launchpad raising $7.2 million in 18 minutes, and Fetch.AI which raised $6 million in 22 seconds.
Potential Benefits of IEO’s
Possibly one of the main benefits of an IEO is the deep vetting process put in place by the partnering exchange. The larger, more reputable exchanges will want to maintain their great reputations and will perform their own due diligence for each and every project.
It also introduces a new, though centralized, layer of security that ICO’s lacked—the exchange itself handles the security aspects of the token sale.
Projects benefit with an IEO through having their token available to already existing clients of the listing exchange; an active audience already in a position to transact with the token. The project also reduces cost in regards to their marketing budget as a large portion of this is absorbed by the exchanges natural marketing reach.
Investors benefit from having immediate liquidity with the token guaranteed to list on the exchange however it still leaves investors vulnerable. Investors will have to retain faith in the exchanges which have had their security issues in the past and the profits these partnerships will generate may potentially put more focus on the value of the coin being traded as opposed to the actual potential and governance of the company.
Is an IEO a more secure investment then an ICO?
Anyone wanting to invest in an IEO still needs to be diligent and seek financial advice. IEO’s still need to be structured as a utility token (a service or use) or security tokens (heavily regulated financial instrument) to be compliant in a number of regions.
Due to regulation, especially in attractive markets like the US, many startup projects come up with crazy tokenomic structures to try to push the ‘utility’ category and avoid the SEC and other financial sector regulators. Many projects are still entering the cryptocurrency space trying to pass off a utility token project that shouldn’t even be in the crypto or blockchain space.
“When the tokens are not being sold as investment contracts, however, they are not securities at all. Tokens sold for use in a functioning network, rather than as investment contracts, fall outside the definition of securities.” Hester Peirce, Commissioner on the Securities and Exchange Commission
Recently I was contacted by a medical development company launching an ICO that will give their token holders access to a low cost pre-cancer screening that they valued around 10 USD per screening. A business plan based on accepting their token instead of …..oh, I don’t know…USD! Even if you removed the token from the business model it still wouldn’t work due to basic economics (in my opinion) and yet they are attracting investors.
It reminded me of the Lemon-Coin Parody video posted below which I believe brilliantly explains many shit coins. FYI I tried finding the original poster of this video to ensure proper credit. If this is not the original source please message me with proper source.
“It’s not even clear to me that their promised due diligence is meaningful, even nominally. It seems to revolve more around ensuring the coins will trade than attesting to the underlying value of either the project or the coins, or the use for the funds raised, or the governance of the project.” Aaron Brown, investor and writer for Bloomberg Opinion
As with any cryptocurrency project or any investment of any nature you should always do your own research and seek your own legal and financial advice before any participation. Don’t take what you see on a project’s website at face value. Research everything. Question the reliability of what you read in the media – even what you may read in publications like Forbes can be paid for. Ultimately, don’t invest any money you can’t afford to lose, don’t put all your tokens in one basket and make sure to utilize cold storage.
As the Crypto Winter thaws and markets recover, more and more projects will try to profit from launching some sort of ICO, STO or IEO – unfortunately many more Lemon-Coins will make their way to the market.
What do you think of IEO’s? Post your comments on them below.
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