Raising funds for a business in 2019 is no longer a mind-racking exercise. Businessmen (or women) are not limited to traditional methods such as seed funding or angel investment anymore. Today, with the help of blockchain-based solutions like Initial Coin Offering (ICO), one can easily generate the requisite capital to kickstart their entrepreneurial ventures. In fact, this trend is witnessing staggering popularity as market figures indicate that the ICO sector alone raked in an enormous $11.4 billion in 2018.
Unfortunately, when compared to the 2017 numbers, ICOs suffered a setback which is attributed to a large number of scams that cropped up during that period. Many investors lost their money through these malicious projects and the trust in blockchain-backed ventures dropped to an all-time low. But, all was not lost! Blockchain technology always finds a way and one of the solutions to the problem was in the form of Initial Exchange Offering or IEO.
What is an Initial Exchange Offering?
To understand simply,
Initial Exchange Offering is a funding mechanism that is processed by an exchange. Here, the exchange serves as a trusted intermediary between the token seller and the buyer. Moreover, the exchange also shoulders the burden of token creation and undertakes the promotion of the product. IEOs are gaining traction over ICOs as the host exchange conducts extensive background checks of the product before featuring them on their platform.
The advantages of the IEO model are listed below:
1. Trust-factor: The host exchange ensures that the projects backed by its platform are legally sound. This way, the exchange helps identify spurious projects that may harm the investor's interests.
2. Enhanced Security: Since the process of token creation and smart contract management is organized by the exchange platform, there is very little room for the seller to trick investors. Moreover, the exchange also ensures that the regulatory processes such as AML/KYC are strictly followed by the featured projects.
3. Simplified Marketing: IEOs help entrepreneurs circumvent the tedious task of managing the process of marketing and promoting the token. Instead, this is overseen by the exchange thereby helping the entrepreneur to focus exclusively on their business.
How is it different from an ICO?
An IEO differs from an ICO in many ways. For a start, an IEO does not require the entrepreneur to invest in an independent platform to launch and manage token distribution. This process is managed by the exchange platform offering IEO services.
Furthermore, it is not mandatory for an ICO project to adhere to different regulations. This is not the case with an IEO as exchanges are rather strict with entrepreneurs flouting regulations. The exchange is also motivated to organize in-depth assessments because its own reputation will get affected if any scrupulous project is allowed to feature on the platform.
The only disadvantage of an IEO is that the entrepreneur is limited to only one exchange platform. However, this is not as bad as it sounds, the platform actively promotes the IEO project and gives it unparalleled access to the millions of users using the exchange.
Are IEOs viable in the long run?
IEOs are growing in popularity mainly due to their enhanced security and trust features. Investors are more comfortable with placing their funds in IEOs as these projects are validated by the exchanges. Additionally, this funding method enables entrepreneurs to cut costs that would otherwise be spent on tokenization and promotional activities. This is because the exchange platform helps them reach a wider range of investors who can pledge support to the project effortlessly.
Of late, a number of leading cryptocurrency exchanges have begun offering IEO services. Exchanges such as Binance, LA Token, IDAX and more are rallying in support of IEO projects and present startups with a variety of features that enable them to reach their business targets faster. In fact, many exchanges are unveiling exclusive IEO platforms, popularly known as launchpads.
Finally, IEOs also play a testament to the versatility of blockchain technology to actively evolve to match new challenges. It also offers effective solutions that help deter frauds and improve financial models.
