Initial exchange offering

Last updated

An Initial exchange offering (IEO) is the cryptocurrency exchange equivalent to a stock launch or Initial public offering (IPO). An IEO is the process of digital asset (e.g. coins or tokens) procurement through an established exchange for the purpose of raising capital for start-up companies. [1] Exchanges act as a middleman between investors and the startup, profiting from fees generated by services rendered during the due diligence process and funding phase. IEO's and initial coin offerings (ICO) share similar characteristics with, however, an IEO can be seen as an evolution from the ICO due to legal influence and an increase in financial regulations within the cryptocurrency market. [2]

Contents

History

The first use of an IEO by a major exchange was in January 2019, with the launch of Binance's platform Binance Launchpad.[ citation needed ]

Advantages

  1. IEO's allow for companies and startups to raise capital in through the sale of tokens or coin on a cryptocurrency exchange. This reduces investor risk by the due diligence and vetting completed by the exchange. [3]
  2. The use of Utility Tokens allow for investors and business to mutual benefit due to the additional access given by holders of a given business utility token. [3]
  3. IEO's create a safer investment ecosystem by providing access to new investment opportunities on a trusted platform.[ citation needed ]
  4. IEO's use the exchanges brand to further promote new projects through their platforms users giving the startup a larger invest pool to raise capital.[ citation needed ]

Disadvantages

IEO's allow for startups to participate in large scale investments opportunities with the introduction of their business to a large investment ecosystem. IEO's are a vastly more secure method of investment procurement for startups, but it comes at the cost of fees paid to the exchange for their time analyzing the business and a predetermined percentage of the capital raised.

  1. Fees rendered during research stage of IEO development and percentage of total revenue earned.
  2. Exchanges vary in security level and overall quality, thus some IEO's may be less effective
  3. The risk of pump and dump schemes is still present in IEO's

Procedure

An IEO which is successful has to follow specific guidelines during the due diligence stage of IEO selection. Since exchanges are using their company brand to promote and invite investors to purchase a startups token or utility coin they insure the project and company is reliable and trustworthy. Platforms that are to promote new startups analyze and vet the businesses white paper, team, business plan, tech and assess the tokenomics of the business. Exchanges vet and analyze business to insure the business plans and projects are up to the values of the exchange. This saves the exchange from damaging their reputation and insures the business is following the global legal requirements such as Anti-Money Laundering Act for cryptocurrency sales. [4]

Regulation

Following the major rise of IEO's in 2019 many regulatory agencies have not created legal restrictions. The Securities and Exchange Committee commented on IEO's stating:

"Be cautious if considering an investment in an IEO. Claims of new technologies and financial products, such as those associated with digital asset offerings, and claims that IEOs are vetted by trading platforms, can be used improperly to entice investors with the false promise of high returns in a new investment space. As described below, IEOs may be conducted in violation of the federal securities laws and lack many of the investor protections of registered and exempt securities offerings." [1]

As of 2022, regulation in major industries have been limited and only a few nations have implemented some level of restriction. Registered national security exchanges and automated trading systems (ATSs) are governed by federal laws and regulations aimed at protecting investors and preventing fraudulent and manipulative trading practices. Several online trading platforms mislead investors into believing that they are registered or meet any of the regulatory requirements for a national securities exchange or an ATS, and so do not provide investors with the investor protections that such exchanges or ATSs provide. By failing to comply with federal securities laws, an IEO and/or trading platform may be operating unlawfully and may not be offering the investors and market protections and remedies these laws are designed to provide. Consider carefully whether the trading platform and the company involved in the IEO have complied with federal securities laws. [5]

Red flags

The following are signs of fraud or illegal behaviour, as stated by SEC:

  1. In the absence of discussion or reference to the U.S. federal securities laws, the IEO and online trading platform should be considered as a red flag.
  2. Any offering that declares it will avoid the federal securities laws of the United States by occurring on an overseas trading platform, but nonetheless allows US investors to invest, should be regarded as a red flag.
  3. IEOs that claim to be vetted by the trading platforms are a red flag. A security offered in the IEO may violate U.S federal securities laws regardless of whether the trading platform vetted the offering.

Further, the SEC cautioned that there is no such thing as an "SEC-approved IEO." [6]

Comparison of IEO and ICO

ICOs were the first method used by cryptocurrency companies to raise money. [7] Ethereum followed suit in 2014, raising about $18.3 million. Its blockchain project was based on the so-called charitable foundation model, in which investors donate to support the project.

The concepts of IEOs and ICOs may seem similar. During the boom of 2017-2018, ICOs on Ethereum were held daily, resulting in many projects raising millions of dollars, although there were also many dubious and fraudulent offerings on the market. [8] Since ICOs could not be verified, the more reliable concept of IEO gradually emerged based on them. In addition, many ICOs were later found to violate U.S. securities laws, which led to various lawsuits and refunds to investors. There are much greater risks involved in participating in an ICO. Investors must send bitcoin or ether to a smart contract or website and hope they receive tokens. Anyone with a little knowledge of smart contracts and web development skills can create a spectacular website with a promising plan of action and start raising money. [9] Thus, investing in an ICO is considered more risky.

Related Research Articles

<span class="mw-page-title-main">Ponzi scheme</span> Type of financial fraud

A Ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. Named after Italian businessman Charles Ponzi, this type of scheme misleads investors by either falsely suggesting that profits are derived from legitimate business activities, or by exaggerating the extent and profitability of the legitimate business activities, leveraging new investments to fabricate or supplement these profits. A Ponzi scheme can maintain the illusion of a sustainable business as long as investors continue to contribute new funds, and as long as most of the investors do not demand full repayment or lose faith in the non-existent assets they are purported to own.

Rahul Sood is the CEO and co-founder of Irreverent Labs, the former CEO of Unikrn), and was the founder of VoodooPC. Sood was also an early investor in AR/VR company Vrvana he's also an investor in blockchain play to earn horse racing game ZED Run, and high-end PC gaming company, MAINGEAR.

<span class="mw-page-title-main">Cryptocurrency</span> Digital currency not reliant on a central authority

A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.

Ripple is a real-time gross settlement system, currency exchange and remittance network that is open to financial institutions worldwide and was created by Ripple Labs Inc., a US-based technology company. Released in 2012, Ripple is built upon a distributed open source protocol, and supports tokens representing fiat currency, cryptocurrency, commodities, or other units of value such as frequent flier miles or mobile minutes. Ripple purports to enable "secure, instantly and nearly free global financial transactions of any size with no chargebacks". The ledger employs the native cryptocurrency known as XRP.

Coinbase Global, Inc., branded Coinbase, is an American publicly traded company that operates a cryptocurrency exchange platform. Coinbase is a distributed company; all employees operate via remote work. It is the largest cryptocurrency exchange in the United States in terms of trading volume. The company was founded in 2012 by Brian Armstrong and Fred Ehrsam. In May 2020, Coinbase announced it would shut its San Francisco, California, headquarters and change operations to remote-first, part of a wave of several major tech companies closing headquarters in San Francisco in the wake of the COVID-19 pandemic.

Kraken is a United States–based cryptocurrency exchange, founded in 2011. It was one of the first bitcoin exchanges to be listed on Bloomberg Terminal and was valued at US$3 billion in January 2024. The company has been the subject of several regulatory investigations since 2018, and has agreed to cumulative fines of over $30 million.

Consensys is a private blockchain software technology company founded by Joseph Lubin and based in Fort Worth.

<span class="mw-page-title-main">Unikrn</span> American esports and media company

Unikrn Inc. is an esports betting and entertainment media company based in Miami, Florida.

An initial coin offering (ICO) or initial currency offering is a type of funding using cryptocurrencies. It is often a form of crowdfunding, although a private ICO which does not seek public investment is also possible. In an ICO, a quantity of cryptocurrency is sold in the form of "tokens" ("coins") to speculators or investors, in exchange for legal tender or other cryptocurrencies such as Bitcoin or Ether. The tokens are promoted as future functional units of currency if or when the ICO's funding goal is met and the project successfully launches.

EOS.IO is a blockchain protocol based on the cryptocurrency EOS. The smart contract platform claims to eliminate transaction fees and also conduct millions of transactions per second. It was developed by the private company Block.one and launched in 2017. The platform was later released as open-source software.

Binance Holdings Ltd., branded Binance, is a global company that operates the largest cryptocurrency exchange in terms of daily trading volume of cryptocurrencies. Binance was founded in 2017 by Changpeng Zhao, a developer who had previously created high-frequency trading software. Binance was initially based in China, then moved to Japan shortly before the Chinese government restricted cryptocurrency companies. Binance subsequently left Japan for Malta and currently has no official company headquarters.

KodakCoin was a photographer-oriented blockchain cryptocurrency that was planned for payments for licensing photographs; however, the project has failed and been shut down. The cryptocurrency was being developed under a brand licensee agreement between Kodak and RYDE Holding Inc., with the relationship and project canceled.

Cryptocurrency and crime describe notable examples of cybercrime related to theft of cryptocurrencies and some methods or security vulnerabilities commonly exploited. Cryptojacking is a form of cybercrime specific to cryptocurrencies that have been used on websites to hijack a victim's resources and use them for hashing and mining cryptocurrency.

<span class="mw-page-title-main">Energi Mine</span>

Energi Mine is a United Kingdom based blockchain technology company, that develops products in the energy management sector. It uses deep learning artificial intelligence models to trade and manage energy. In February 2018, Energi Mine completed an initial coin offering (ICO).

<span class="mw-page-title-main">Tezos</span> Decentralized open-source blockchain

Tezos is an open-source blockchain that can execute peer-to-peer transactions and serve as a platform for deploying smart contracts. The native cryptocurrency for the Tezos blockchain is the tez. The Tezos network achieves consensus using proof-of-stake. Tezos uses an on-chain governance model that enables the protocol to be amended when upgrade proposals receive a favorable vote from the community. Its testnet was launched in June 2018, and its mainnet went live in September 2018.

A security token offering (STO) / tokenized IPO is a type of public offering in which tokenized digital securities, known as security tokens, are sold in security token exchanges. Tokens can be used to trade real financial assets such as equities and fixed income, and use a blockchain virtual ledger system to store and validate token transactions.

<span class="mw-page-title-main">0x (decentralized exchange infrastructure)</span> Cryptocurrency

0x is an open-source, decentralized exchange infrastructure that enables the exchange of tokenized assets on multiple blockchains. Developers can use 0x to incorporate exchange functionality into their applications, and market makers can use 0x to create markets for cryptocurrencies and tokens. ZRX, an Ethereum ERC-20 token, is the native governance and staking token of 0x. Individuals who own ZRX can vote on protocol changes and stake their tokens to earn liquidity rewards in Ether (ETH). The project's creator and core developer is 0x Labs.

<span class="mw-page-title-main">Solana (blockchain platform)</span> Public blockchain platform

Solana is a blockchain platform which uses a proof-of-stake mechanism to provide smart contract functionality. Its native cryptocurrency is SOL.

Tokenomics is a term that refers to the study and analysis of the economic aspects of a cryptocurrency or blockchain project, with a particular focus on the design and distribution of its native digital tokens. The term is a portmanteau of words token and economics.

References

  1. 1 2 "Initial Exchange Offerings (IEOs) – Investor Alert". www.sec.gov. Retrieved 2022-03-28.
  2. ↑ "Explainer: Initial exchange offerings flourish in crypto market". Reuters. 2019-06-20. Retrieved 2022-03-28.
  3. 1 2 Anson, Mark (2021-03-03). "Initial Exchange Offerings: The Next Evolution in Cryptocurrencies". The Journal of Alternative Investments. 23 (4): 110–121. doi:10.3905/jai.2021.1.127. ISSN   1520-3255. S2CID   232432696.
  4. ↑ "Fedlex". www.fedlex.admin.ch. Retrieved 2022-03-28.
  5. ↑ "SEC.gov | Initial Exchange Offerings (IEOs) – Investor Alert". www.sec.gov. Retrieved 2022-04-14.
  6. ↑ "The SEC: IEOs are a pile of red flags". www.sullivanlaw.com. Retrieved 2022-04-14.
  7. ↑ "Initial Coin Offering (ICO): Coin Launch Defined, with Examples". www.investopedia.com. Retrieved 2023-12-24.
  8. ↑ "Where Did The Money Go? Inside the Big Crypto ICOs of 2017". www.forbes.com. Retrieved 2023-12-24.
  9. ↑ "Investor Bulletin: Initial Coin Offerings". www.sec.gov. Retrieved 2023-12-24.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.