ICO 2.0 – The IEO Financing Model
Signs of recovery in the crypto field are obvious and the investing public is again interested in companies operating in this realm. Thus, with the initial coin offering (ICO) era considered over, it seems there is a new tool for financing – the initial exchange offering (IEO). This method of financing is more transparent and reliable for investors, entrepreneurs, and markets, providing partial solutions to the many disadvantages exposed in ICO financing.
In the ICO financing model, a company sought to raise funds through selling designated digital “coins” (tokens), which represented certain rights identified in the offer document (White Paper). The company would set up a designated website, invest significant resources in order to interest the public in the offer, and allocate the tokens to buyers through a smart contract.
This financing method came with many problems, which ultimately led to investors’ loss of trust. The plethora of fraud and deception, cyber hacks, high financing costs, and regulation blowing down its neck were some of the flaws that led to a new method of financing and fund raising. In the IEO financing method, the offer and sale process takes place through a third party, the crypto exchanges, directly to their registered user public.
The crypto exchanges that make their platforms available to the IEO process properly vet the companies seeking to finance through tokens. As such, a process of advance selection by a third party perceived to be reliable is created. At the end of the sale process, the tokens are registered for trade on the same exchange, similarly to traditional financing by IPO.
As opposed to the ICO model, financing in the IEO model carries many advantages for each of the parties involved.
Investors: The clear advantage for investors is the minimized risk of fraud. Failure to finance or the performance of fraud by the financing company would compromise the exchange’s reputation, to the effect that it will likely aim to choose reliable projects with good prospects for success. Another significant advantage for investors is the registration of tokens for trade at the end of the financing process, which creates a market price and liquidity of the investment for the investor.
Entrepreneurs: The company is spared the heavy costs of advertising that were necessary for a successful sale, because the exchange has an existing user base and is the one charged with marketing. In addition, there is no longer a need for security mechanisms against cyber-attacks because the exchange itself works to prevent fraud. Furthermore, investors’ need to conduct “know your client” (KYC) checks is also eliminated, since exchange users will have already completed the registration process.
The Exchange: The exchange enjoys fees and amplifies through this process its user base, since anyone interested in purchasing the financing companies’ tokens must first register with the exchange. Therefore, thanks to the registration of tokens for trade at the end of the financing, the extent of trade grows, which is important to any exchange.