ICO vs IEO vs STO – The rise of Initial Exchange Offerings

2019-05-22T10:28:07+00:00April 11th, 2019|

It’s the 8th of April 2019, and all I can say is: “It’s been a hell of a ride”. I feel absolutely privileged to have watched this industry grow from its stages of infancy to where we are right now. BTC just re-hit the 5200$ mark, ICOs have started taking their projects a lot more seriously, the charlatans of the industry are slowly being jailed or have started shifting their focus elsewhere. And most importantly, we are about to see the introduction of a ‘new’ funding method, the Initial Exchange Offering.

Before I jump right into it though, I thought it’d be best to look at the industry in retrospect. My other non-crypto companies (supported by many studies) have taught me that past data can grant insights into future forecasts, and I find it to be quintessential that we, as an industry learn from the past, and apply our understandings into the future.

The Rise & Fall of the Initial Coin Offering:

An Initial Coin Offering is, in some people’s mind, the wild west’s equivalent to an Initial Public Offering. Acting as a fundraising mechanism, it allows projects to raise money via the Tokenization of their project, this is done by granting the token a utilitarian value within the business’ value proposition. An example, for instance, could be Project X: now Project X is a Global E-commerce Project looking to raise 20 million USD in funding. The founders sit down and decide that they are against the traditional route of granting equity to Venture Capitalists and instead decide that they want to launch their project via the untraditional Initial Coin Offering Path. They then develop a tokenomic model, stating that customers must transact on their upcoming E-Commerce Platform via the ingenious X Coin. This newly formed “X Coin” can now not only be used to transact within the platform but can also be used to purchase other Cryptocurrencies on readily available exchanges that agree to list X Coin after it’s offering. This means that the value of X Coin is directly tied to the value of Project X, and will therefore be available for speculative trading. Now the whole catch of the ICO is that participants will be able to purchase the aforementioned X Coin at a higher discounted price as opposed to buying directly from an exchange in the future, when the project is listed, if listed…

The ICO Hype had initiated itself in the so-called 2017 ICO Boom, which followed shortly after BTC hit its all-time high of approx. 19,000 USD. Thousands of projects had jumped into the trend as Fundraising Success Rates where exceptionally high. A whole new sub-economy had been created, and that is when we saw the entry of ICO Service Agencies, ICO Advisors, and the practical use of Ethereum. Hundreds of Millions where being raised in as little as minutes. The hype and stupid money lasted well above my expectations before global Financial Regulators had caught up and the market had been brought to its senses.. The projects that had hopped on to the trend mid-way where now stuck, and funnily enough, were reverting to traditional investors. I want to mention that I heard a couple of funny phone calls during this time as well: ICOs calling the famously discreet Family Offices worldwide asking them if they want to buy tokens, the poor receptionists thinking it was Telemarketing calls for discount coupons would typically hang up.

Some projects however, made it work. Note that numerous Investors & Institutions worldwide had caught a glimpse of the fast-growing Crypto Market and wanted a bite. This gave rise to the SAFT deal, meaning that a large investor could buy a hefty sum of a project’s tokens at a majorly discounted rate in return for FIAT currency. Other projects were also closing deals by selling Equity and maintaining their Token based business model. It is thanks to these developments that we now come across ICO 2.0, the Security Token Offering.

Introducing the Security Token Offering:

Murder was in the air. What was supposed to be the ICO Killer of 2018 was the Security Token Offering, which is very similar to an ICO. Project X would either register itself as a security with their jurisdictions financial regulator and maintain a utilitarian use case or they’d attach to the value of say property, or the company’s dividends. It still consisted of Business Ideas that wanted to avoid the Traditional Fund Raising routes and hop on the crypto bandwagon by implementing a token of some sort within their business ecosystem. The STO gave investors, both accredited and non, the ability to invest in projects that were registered within the books of the launching jurisdictions Financial Regulator. This meant that Coin Offerings couldn’t just disappear, instead projects would register themselves with, lets say FINMA, as a Token Offering and abide by the legislations & recommendations of the regulator upon aspects such as Marketing, Community Management, and KYC/AML. This development too, created a set of sub-economies within the industry, fuelling the development of STO Exchanges such as PolyMath & tZERO, giving rise to STO Service Providers, and funnily enough, causing all ICO Advisors on Linkedin to rebrand themselves to STO Evangelists…

What an industry we live in.

Now, the STO could have potentially been the perfect solution to the limitations of the ICO, especially on aspects such as Investor Safety, Security & Transparency. However, one problem remained unsolved, liquidity. What was the purpose of having a safe token, solid project, and an excellent team to back it up if an investor didn’t know when & if the project would even be listed? This is where patience is paramount, giving the STO model time to mature and regulations to catch up. One thing I learned in business is that people tend to overestimate the short term impact of innovations but, more importantly, underestimate the long term impact. Are STOs such an innovation? We’ll have to see, however the attention has now shifted to Initial Exchange Offerings (IEO) which is raising crazy money again… and FOMO seems to have kicked in.

However, before introducing Initial Exchange Offerings, I think it’s paramount to talk about Exchanges.

Exchanges:

Now we all know what a Cryptocurrency exchange is, a platform where users can trade Cryptocurrencies of all sorts in return for Major Cryptocurrencies or Fiat & vice versa. Exchanges are the final frontier to say Project X actualizing itself into a well-funded business, because only an exchange has the capacity to connect the project to live liquidity. The real question is, have we been informed with the latest developments of the Exchange Game, which I find to be an absolute pre-requisite to be aware of before hopping onto the IEO hype, as exchanges are the foundations upon which Initial Exchange Offerings are set. They are the regulator, the liquidity provider and the trusted part by investors for vetting projects… that’s a lot of responsibilities!

Quite the fiasco within that scene too.

Yesterday Chanpeng Zhao, CEO of Binance, tweeted “This is getting a little of out of hand. The exchanges above fail to realize: CREDIBILITY is the most important asset for any exchange! If an exchange fakes their volumes, would you trust them with your funds?” This comment was a direct response to the fact that Binance is listed as #8 on the Top 100 Exchanges by Volume on CoinMarketCap. CMC currently lists as many as 253 exchanges, most were formed during the 2017 Winter Bull Run, exist in the “redest” of red oceans and are still operating to date whilst dancing Tango with the ever-increasing requirements & legislations of Financial Regulators.

Most legitimate Exchanges make money on trading volume, whilst several other lesser quality ones make money on the incurred losses of clients. As trading volume declined in 2018-19 exchanges had discovered another golden ticket to stay afloat, and that was ICO Listing, this meant that excellent projects could be onboarded on the exchange once their raise was completed so that Investors could begin liquidating their investments. This also meant that garbage projects could be onboarded for a price of 5-10 BTC, and the dodgy owners of the projects could liquidate their token holdings for a quick buck at the expense of the community behind the project itself. As a matter of fact, many Exchanges had employed entire Business Development teams that were responsible for hunting down ICOs and closing them for any price within the range of 5-10 BTC. I remember when you’d text the CEO of any Exchange on Telegram and the first thing they’d say is “Are you looking to get listed?”. As the founder of IBC, I was bombarded by such questions on a regular basis in the early days of the hype

The exchange community is filled with the good & the bad, but as per CZ’s tweet, mainly overpopulated by the bad. It’s difficult to blame anyone as competition is fierce and demand has been low, but the short-sightedness of some exchange leaders is doing nothing but hurting the industry in the long run. Human nature can fall prey to many cognitive biases, in this case the all-too-common immediate gratification bias.

The Holy Grail of Investing, Liquidity aka IEO:

Back in 2018, while browsing Linkedin, I came across an excellent infographic, that perfectly demonstrated the outlay of the Cryptocurrency Market’s most major constituents. I couldn’t find the exact copy, however, it looked something like this:

And not only had it demonstrated the perfect divide between the bodies of the industry, but it had also struck a major understanding in me: The only way that ICOs would survive & become a viable way of fundraising (at least in the short term) is only if Exchanges or Funds would assist them with solving their liquidity issues. As it turns out, Exchanges did just that.


A couple of months later, Binance released their own IEO “Launchpad” where ICOs could apply to be listed as an Initial Exchange Offering, thus making themselves available for buying & selling upon initiation.

Huobi also released their own IEO portal “Huobi Prime”, where ICOs too can apply.

Over 6 exchanges have decided to follow the trend, and I reckon most will follow suit.

The IEO Listing Process is as follows: The Exchange receives the applications, reviews and judges them based on their Tokenomic model, their team, their cap, their community, and then if accepted, gets back to them with the price to be listed and the success fee the exchange will charge (which is currently insanely high). Their preference lies in tokens that are major, transparent, and in good quality projects that have the potential & willingness to actually develop their product/service line after the initial raise. The price for listing ranges anywhere from $50k to $1m, and is steadily increasing as demand for IEOs continues to rise.

Our success rate with IEOs has been at a ridiculous 100%, with Tokens raising millions in the first minutes or hours of listing. I can guarantee, and I am sure anyone can guess, this will not (and should not) last.

For Example:
BitTorrent raised $7.2Million in 18 minutes.

Fetch.Ai raised $6Million in 22 seconds.

I do not know how long this hype will last, I will never be foolish and try to time hype and there are many externalities which would impact this timeframe, however, 1 certainty is that the market WILL once again correct itself. As FOMO settles, investors will apply basic common sense when vetting IEOs.. Larger exchanges such as Binance will hopefully qualify projects in the best LONG TERM interest of their users rather than short term profits (this will be challenging without regulators compensating for human greed). The smaller exchanges are more likely to fall prey to immediate gratification bias, which will lead to lower quality projects with a higher failure rate, hurting their users which may move to better exchanges with better projects.

What does the IEO surge mean for my project?

Now here’s the beauty of the IEO, specifically for all those ICO projects that stepped in half-way a little after the 2017 ICO Hype, and got stuck due to the rapid fall in ICO demand. The IEO is the fastest and most reliable way to fundraise at the moment, irrespective of my thoughts on the hype. If you are an ICO that failed to raise funds, or had to refund because of insufficient traction, then a different approach must be taken as Exchanges are seeking fresh projects: In this case a total restart & rebranding would be most applicable.

Be warned, the fees are generally very high for launching an IEO, and so is the success fee. Exchanges are in a very strong position as they own the liquidity a projects need, and they are charging hefty prices (something I am not too impressed with, however, we live in a capitalistic society where supply/demand dictates price). At IBC we managed to develop a lean structure in which we can not only get you on an exchange, but your capital outlay will be very minimal (covers marketing + exchange fees), however we are not able to avoid the massive success fee required for an IEO.

Advantages of the IEO Structure:

  • Immediate Liquidity for projects after raising capital (this can also be perceived as a con as it encourages speculators rather than long term investors)
  • AML/KYC conducted directly by the exchange.
  • Less marketing capital required.

Disadvantages of the IEO Structure:

  • Exchanges are still susceptible to fraud and pump & dump schemes, especially smaller ones that are not concerned with their brand equity.
  • The exchange is a new point of failure as they act as the custodian of private keys
  • Well connected projects may receive preferential treatment to list on exchanges
  • Potential price manipulation by investors holding the majority of coins, the same issue we’ve experienced with ICOs
  • Potential price manipulation by investors holding the majority of coins, the same issue we’ve experienced with ICOs

Where does IBC Group come into a play:

IBC is a company I launched in 2017 along with my Blockchain law firm (IBL) and my Blockchain VC Fund (IBI) with the core focus of helping projects raise capital. Having assisted dozens of projects raise millions since the initial hype, I can honestly say that there’s no Initial Offering Service Company out there that could match the level of experience and knowledge that the team and I bear. And this isn’t some cocky over-statement, but instead, a direct by-product of time. We’ve been in the market for approximately 3 years, we know exactly what it feels like to have a project raise millions, we know exactly what it feels like to have a project fail right in front of our eyes, either because of bad timing or bad market reciprocation, we also know what it feels like to have to turn down a project because some constituents didn’t add up. We’ve worked with many successful projects in the ICO hype, and continued to raise capital through Private Placement once the token market collapsed. We’ve been through the STO excitement as the next big trend. We’ve also been through the no hype phase, where everybody wanted to pay us either on a success basis or in tokens that could rarely be liquidated (I personally didn’t mind this period of time as many good projects were able to develop their product.

We are now going through a new hype, and although it bothers me to see projects we launch raise such large amounts of capital within such short periods of time, I am hoping and am confident these projects will deliver.

Why is IBC the first (and currently only) large agency to work with exchanges on getting projects successfully listed on their IEO platform? 3 reasons:

  1. We have built very close relationships with all exchanges, with team members becoming personal friends with the owners and managers
  2. Our reputation withstood the test of time. We have ALWAYS been above board and done the right thing. I have been in business for a long time, launched many companies and I understand the value of doing the right thing
  3. Exchanges want to launch projects that build a good product to sustain their token price for their users, and when IBC backs a project, this gives the exchange reassurance that the project is in good hands. We will work with a project after the IEO to ensure a successful product launch.

As I mentioned above, we have developed a very unique and inexpensive approach to launch the IEO, with 3 phases to ensure minimal capital outlay by a project:

To conclude, IEOs are 2 steps forward, 1 step back for token fundraising, and one thing is for sure: Money has not been easier for projects since the ICO hype, and this time the legal risks have been significantly mitigated by the exchanges and liquidity is instant! The model we have built allows synergy between IEOs, ICOs, and private fundraising structures to help a project raise the most capital at the lowest cost.