A Definitive Guide to Initial Exchange Offerings
Hello IEO! What’s New on Your Side?
Trustless anarchy in the crypto industry, especially with the appearance of IEO (initial exchange offering), has incited players in this ecosystem come up with an advanced alternative solution to setting up a new algorithm for fundraising operations. An initial exchange offering is an innovative approach to the crowdsale process: a revolutionized fundraising model that enables crypto projects to raise funds directly on exchanges.
This token sale concept is somewhat similar to an initial coin offering (ICO). An IEO provides investors and stakeholders with the opportunity to enter the cryptocurrency ecosystem through an exchange in order to contribute funds to a particular project. The major difference in the IEO process is that it operates via cryptocurrency exchange instead of token-sale cabinets or project websites. This approach allows known, proven exchanges to administer the process of investment contribution and grant stakeholders a higher level of security.
With an IEO, projects and startups can approach crypto exchanges to provide information about their product, idea, token model, and necessity. Afterward, crypto exchanges perform a due-diligence check and precisely research the project’s documentation to ensure its feasibility and credibility. This process grants participation only to promising projects with a well-stated, well-thought-out development strategy.
Is an IEO a Justifiable Substitution for an ICO?
Unlike ICOs, initial exchange offerings are backed by an exchange platform. All fundraising procedures are operated by crypto exchanges acting as quality guarantors. The market is like the sea, with a tendency to move consistently or in a volatile manner under the pressure of “climate” conditions. The ICO wave lasted for a certain period of time after rapid development in 2018; however, by the end of the year, it was gradually losing its value on the market. Today, the new IEO phenomenon has arisen as a new level of coin-offering transformation.
According to an ICObench market analysis, by January 2019, the number of ICOs had tended to drop; success rates and the general average were lower compared to previous months.
According to research performed by Diar Analytics, the fundraising market plunged into a recession due to a sharp drop in the crypto and token markets as well as regulatory growth risks. In 2018, ICOs accounted for the overall volume of funds raised: over $12.2 billion.
Among other reasons for the plummeting of token prices, we can outline the following:
- legal uncertainty
- a high percentage of scam projects
- a poor framework of protection for stakeholders’ rights
- increased measures from financial regulators
Nowadays, the market seems to have gained maturity with the appearance of the IEO phenomenon. Acting as an intermediary platform, exchanges play an essential role in decreasing the risks of misleading behaviors and fraudulent schemes. Let’s look at the initial exchange offering statistics for the last three months.
Is this a transitory trend, or an enhanced pattern of fundraising activity? We are going to be objective in our statements based upon the latest updates and analysis from our insider perspective, giving you the ability to analyze and evaluate IEO characteristics in our comparison table below:
Unlike ICOs, in which investors make contributions directly to founders’ crypto wallets, IEO stakeholders have to register on a certain exchange and complete KYC/AML procedures.
An initial exchange offering is beneficial not just for certain parties, but for everyone. Let’s see the advantages initial exchange offerings offer to each party in the crypto system.
Projects and Startups
The benefit for projects is simple: commonly, project developers aren’t cryptocurrency experts or token-launch specialists. The process of a token sale event launch requires proficient experience and knowledge. In the case of an IEO, projects can rely on the exchange’s expertise to conduct the token sale for them. There is no need to establish and develop costly TGE cabinets or integrate KYC/AML modules, as the exchange takes care of these processes and grants reliability and security. In addition, cryptocurrency exchanges promote tokens and conduct marketing activity to let a high number of users know about the project and its goals.
Investors and Stakeholders
Token sales are usually established on a known exchange with global presence and a big number of users who trust its services. Investors and those willing to contribute are assured of a trustless deal settlement and easy contribution process. As long as the token is listed on the exchange, investors can feel safe that the project has undergone due-diligence research. With proven viability, there is no need to conduct separate research on the project and its team. Another advantage is the ease of contribution of funds, which doesn’t require complex transaction processing with several wallets. Instead, the investor only needs to deposit funds in the exchange account, and the tokens can be purchased.
Cryptocurrency platforms and exchanges benefit from IEO process settlement, as they charge fees for the token to be listed. Fees range from very low up to 40 BTC. This depends on the exchange, its services, and its market reputation. Though IEOs might be costly in certain cases, a token event can raise millions of dollars for project development, fully covering listing expenses.
IEO Process Review: How to Become a Member
Generally, there are no strict rules regarding the IEO launch process. Timelines, duration, and fees vary from exchange to exchange, and are negotiable. Rules and requirements depend upon the exchange, as well. However, there are common guidelines and “must-haves” projects will need to follow in order to ready themselves for an IEO launch.
Before considering the full process of listing an IEO on an exchange, let’s split it into two stages:
- Preparation stage
- Establishment of Cooperation with an Exchange
There are critical factors for a project to consider before partnering with exchanges in order to conduct an IEO. This is actually the strong point of initial exchange offering policies: professional due diligence is a compulsory procedure for any project. You will want to be fully prepared before stepping onto the IEO path, since without a well-organized strategy and solid background, your efforts could turn out to be useless. This is the reason for the rigid approach of exchanges toward project reviews. If misleading activities are revealed, they risk their reputation; and correspondingly, the project is doomed to failure without a second chance to take part in the IEO. We have negotiated with plenty of exchanges, thoroughly studied the mechanism of IEO listings, and analyzed the major metrics of project credibility. So here it is. We’ve compiled a definitive list for your project to succeed. To take part in the IEO, your project must present:
It’s an essential benchmark for any investor looking for a project to have a detailed description of the token model, its features, and its value over the long term. It is crucial to decide which type of token the project is going to deploy, and which programs and special features it is going to offer users. Token value must be defined according to its correlation to real-world assets and functionality.
The following aspects are of primary importance:
Token Issuance Conditions
- crowdfunding model definition and motivation
- token distribution model description (must include total token amount and initial token price)
- allocation of funds: description
- token-flow description
- token standard
- token characteristics
Don’t know how to craft all these properly? Get in touch with the Applicature consulting team to provide you with an explicit model for your future reference.
All projects need to be attractive to investors and showcase their structure, roadmap, tokenomics, and other relevant justifications. All of these aspects have to be disclosed in the white paper, a document containing technical project details as well as a detailed description of the architecture, current state and future distribution of tokens, financial project market, and precise calculations. Information about the project team, advisors, and partners is also included. The one-pager, website, pitch decks, etc. are components that contain the main source of knowledge about the project for potential contributors and exchanges so they can be totally aware of your goals and intentions.
Business Plan with Future Revenue Projections
The business plan has to outline your company’s road to achievement of specific goals and tasks. It is necessary to understand the operational model and its monetization activities. Therefore, the business model should identify the following aspects:
- company’s use cases in the chosen industry
- key features of the business model
- financial model implementing key financial projections, including:
- future revenues
- net profit
- operational expenses
- capital expenses
- explanation in accordance with the chosen business model
- monetization model and revenue streams
Having reputable team members and advisors will definitely boost your chances of being listed on an exchange. Technically complex projects need a profound, qualified team with proven development experience. In case of a lack of experience, projects refer to expert companies to facilitate the process and assist in building the road to achieving their ultimate goal. If you believe your strength in the implementation of your project idea may need a stronger foundation, Applicature experts can map out your development points and push them in the proper way.
Social Community & PR
Making the strategy as attractive as possible to investors is the work of SMM specialists and PR managers. Public relations can expose you to new audiences. Here, it is worth paying attention to related media outlets where your project can generate interest and attract a relevant audience and followers. With consideration for future promotion of your IEO, it is important to work on growing a user base and creating hype around the project on social channels (Telegram, facebook, Instagram, Reddit threads, Youtube, etc.). This will definitely bring tangible results in terms of attracting investors.
Of course, exchanges will perform professional due diligence on your project to ensure high quality. This will be done according to its own reputation based on the experience of top-notch experts, business analysts and strategists, development teams, and lawyers. From an investor perspective, this new type of token offering provides greater confidence and trust.
Partnerships also play a considerable role in your project path. In order to complete and establish credibility with exchanges, startups may need to represent trustworthy business models with an endorsement from partners who can prove the legitimacy of your promises. Why is this so important? Sometimes, it’s crucial to learn from the mistakes predecessors in order to avoid your own mistakes. Let’s examine the recent events with the Raid project , which wanted to launch its IEO on Bittrex. Considering the fact that Bittrex canceled the RAID IEO due to termination of their strategic partnership with OP.GG (the most interesting part for users), we can definitely state that exchanges are highly reactive to any malicious activity, and aware of any signs of mistrust.
Getting a lawyer to issue a legal opinion for you is no less important as a regulatory must-have than the IEO elements we have already covered. There are a vast spectrum of legal requirements and recommendations for accessing an IEO, including:
- preparation of operating & investment documentation
- KYC procedures
- risk assessments to get rid of pitfalls during the IEO process
- SEC compliance
To protect projects and their investors, it is critical to mitigate risk through regulatory compliance. Legal experts provide vital know-how to properly structure and form the financial and legal foundation of your offering.
Smart-Contract Development & Audit
Your smart contract needs to be 100% secure since any minor vulnerability could cause destructive ramifications and lose billions of funds. It’s critical to review and audit your smart-contract architecture and codebase to identify vulnerable spots beforehand. Our technical team analyzes smart-contract design to understand business logic first. With the help of automated tools, we check the code, conduct a manual end-to-end review, and deploy SC on the testnet. The deliverables are as follows:
- a profound initial smart-contact review
- compilation of a checklist with a detailed summary of vulnerable areas
- recommendations for possible enhancements of smart-contract semantics
- report/description of work done
Want to get accurate, high-level recommendations from our developers? Check out our current proposition for validating your smart contract and avoiding the risk of being hacked .
The marketing plan should be defined even before actual product development. The right marketing strategy will help you find an appropriate audience and create hype around your product by driving attention to it and attracting investments. In terms of the IEO, exchanges are interested in taking care of the marketing campaign, as the startup pays fees, and a certain percentage of the tokens sold goes to the exchange account. Therefore, startups can now save on marketing their budget in comparison to the considerable financial expenditures inherent to ICOs.
One more interesting thing is the current favorable audience climate, which creates a better contribution rate for the project thanks to the existing customer base on the exchange. Nevertheless, the other 50% of your success depends on your own marketing strategy and design.
Compared to ICOs, in which well-designed project concepts (mostly described in white papers) illuminate the main incentives and points of trust for investors, an IEO is an absolutely different model, right down to the details of product development progress described throughout the project roadmap. Due to the high percentage of scam ICOs, people can no longer believe bare ideas. Even with project development underway (for example, the project, which has developed an internally operational test network operating since September 2018), this factor is favorable when approaching an exchange.
An accurate example of a minimal viable product is BitTorrent , with 100 million users before their IEO launch.
Step-by-Step Interaction with Exchanges
Once the preparation stage has been finalized, with consideration of all of the above-mentioned factors, it’s time to step into direct interaction with exchanges:
- Team founders get in touch with listing support managers to discuss further actions on the exchange.
- A team member submits a request with detailed information about the project (smart-contract address, white paper, team members, MVP, business plan, all relevant documentation, data about token distribution, related links to software resources, etc.)
- Before running an IEO, founders need to agree on listing fees.
- Direct communication with project founders and their partners to confirm the credibility of the team and the project itself. Factors like MVP, product prototypes, previous success in product development, public announcements, and technical and business maturity are key when negotiating with exchanges.
- Signing an engagement letter and agreement on a listing fee.
- According to legal documents approved by a legal advisor, exchanges define restrictions on investment policy. Anyone has the right to invest in an IEO, except restricted countries with regard to digital assets: the U.S., North Korea, China, New Zealand, and Venezuela. Each investor has to go through the KYC procedure in order to be verified on the platform. It is worth mentioning the partnership between the crypto exchange Binance and the risk-management firm IdentityMind to enhance KYC/AML compliance measures with IdentityMind tools.
- Developers generate tokens with the ERC20 standard or any other ERC-compatible standards supported by a specific exchange, then send them to the exchange account in accordance with the mutual agreement.
- These tokens are visible to users on the platform to conduct transactions. After the funds are transferred, the platform makes public announcements on its media channels.
- The exchange establishes a maximum investment limit and restrictions on contributors.
- The sale procedure can last for several minutes/hours for large exchanges. For small ones, it can last a few days.
Are You Ready to IEO? Take Care of Your Project’s Due Diligence in Advance
Currently, crypto exchanges offer a favorable microclimate for token launches. However, that doesn’t mean startups can neglect scrupulous consideration of criteria in order to become endorsed by the exchange. They must follow all the requirements in order to penetrate this new crypto niche. With all “weapons” in your arsenal ready to go (see our must-haves, listed above), and after undergoing due-diligence review and auditing, you can be 100% assured that you are ready to conquer the IEO path. The exchange, as an intermediary platform, is responsible for ensuring project credibility for stakeholders.
“IEO is a very time-sensitive and emerging crypto-market niche to penetrate. You’ll want to make it happen in one shot, so make sure you are ready for it 100 percent,” says Nazar Khrupalo, Applicature Head of Sales.
This is how Applicature can assist your IEO:
- Initial high-level IEO review and validation
- Introduction to a legal advisor to find out whether you are in compliance with the law
- In-depth review of IEO materials by business analysts
- Identification of possible vulnerabilities, assessment of project maturity, evaluation of the current situation
- Preparation of a recommendation list for upgrades
- Connection with an exchange if your project is ready to go after our assessment
- As a bonus, we offer a set of use cases applicable to your startup.
We have profoundly analyzed market trends and tested various scenarios to identify the best options for your IEO’s successful roadmap .
Which IEO Platform to Choose?
Whether an IEO is an effective fundraising model is still in question; however, considering rapid and successful token sales, it could definitely create a new crowdsale boom. The Bittorrent public sale raised approximately $7.2 million in less than 18 minutes on the Binance Launchpad platform. Another, Fetch.ai, beat the indicators of Binance’s previous predecessor by raising $6 million in only 22 seconds.
In the process of selecting an exchange, IEO projects must consider the following aspects:
- Location. Where does the exchange operate?
- Targeting. What is the main target audience of this exchange?
- Features. What are the features that make this exchange stand out from the crowd?
- Niche. There are specialized exchanges that work more on different projects: technology, gaming projects, major cryptos. That’s why the niche in which the exchange operates is also super important.
A high number of exchanges are conducting IEOs, including industry giants like Binance Launchpad, Bittrex, and Huobi. They have achieved bright results. Let’s see which ones are active now.
Active IEO Platforms
Currently, Applicature has established communication with the following exchanges:
Originally published at https://applicature.com on May 8, 2019.