The IEO Sh*twagon Cometh

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Why? Just, why?

The author would like to thank Olta Andoni, Esq., Adjunct Professor of Law at Chicago-Kent College of Law, Illinois Institute of Technology and Head of Blockchain Practice at Ziliak Law, LLC, for her valuable assistance in writing this article.



Anyone who has spent any time involved with — or even just been a careful observer of — the blockchain and cryptocurrency industries is bound to notice that there is an abject lack of critical thinking demonstrated by a surprising number of participants in the space. One truly wonders how a technological advancement that is at once so groundbreaking while also being quite difficult to understand can attract so many people who seem unable to use the brain that God gave them to think for themselves. Our hypothesis is that desperation and greed likely play some role in the prevalence of that condition. It is therefore no surprise that we now see the rise of something called the initial exchange offering (or “IEO”).

(IE)Oh for #@*$% sake!

The frequency with which articles and blog posts appear praising the “evolutionary progression” of ICOs to IEOs suggests the number of suckers being born is far greater than one per minute. Exactly who thought up the concept of the Initial Exchange Offering is unclear, but we would surmise a conversation much like the following* took place:

*The conversation below is a work of fiction. Names, characters, businesses, events, and incidents are either the products of the authors’ imagination or are used in a fictitious manner. Any resemblance to actual persons, living or dead, or actual events is purely coincidental.

CZ: Yo, team! How we doin’?

Team BNB: Hey boss! Not good. Listing fees are down. Way down.

CZ: ‘sup with that?

Team BNB: The ICO bubble burst. Investors finally figured out what a joke they were.

CZ: Hahaha! Took them long enough, right?

Team BNB: Hahaha! That’s true, boss! But it’s no bueno! If ICOs aren’t hitting their ‘caps, they have no money to list!

CZ: Hmm! That really is no bueno! Let me think…

Team BNB: (grimaces expectantly)

CZ: What if we just skip the ICO altogether? Then we can collect a listing fee on the front end and a success fee on the back?

Team BNB: ??? Ohhh!!!

CZ: And why stop there? Let’s bring everything in-house and charge for all the services normally handled by ICO advisors and consulting firms! Cut out the middleman!

Team BNB: Disintermediation!!!

CZ: You got it, people! I figure some fee is better than no fee, so who cares if the project is successful? Either way we get paid, right? Let’s call it an ‘I-E-O!’

Team BNB: IEO! IEO! (that’s why he’s the boss) IEO! IEO! IEO! …

Did this conversation actually take place? Unlikely!

Does it represent exactly what is going on with IEOs? Yep!

IEOs are worse than ICOs

We’ve been skeptical of IEOs since we first heard about them and so far nothing has changed our opinion. In many ways they are worse than ICOs, for the following reasons:

IEOs only benefit exchanges

IEOs exist for one reason and one reason alone — to enrich cryptocurrency exchanges at the expense of founders and investors. As the above hypothetical conversation at an unnamed exchange aptly demonstrates, IEOs allow exchanges to capture listing fees even if the project (or IEO) fails, which we expect most will do (with the obvious exception of those hand-picked by a certain unnamed exchange because there is no way that the CEO of that unnamed exchange would let one of its flagship IEOs fail, causing embarrassment and damaging the unnamed exchange’s brand — all hypothetically speaking, of course).

IEOs probably violate securities laws

Second, there are the securities law issues. In its Cease and Desist Order dated December 11, 2017, the U.S. Securities and Exchange Commission (“SEC”) determined that tokens sold in the Munchee ICO were securities. This was due to the fact that Munchee had primed investors to have an expectation of profits. According to the SEC,

Munchee highlighted that it would ensure a secondary trading market for MUN tokens would be available shortly after the completion of the offering and prior to the creation of the ecosystem.

In other words, if you don’t want your token to be considered a security by the SEC, you should not tell prospective investors that it will be available on an exchange. The problem with IEOs is that the act of simply launching one is by itself communicating to prospective investors that it will be available on an exchange. Unless you actually want your token to be deemed a security, we think an IEO is a very bad idea.

IEOs don’t fix misaligned incentives

Finally, despite constantly parroting language about how they are “more reliable than” or “improve upon” ICOs, we don’t think that IEOs actually fix anything. In fact, they make the most fundamental flaw in ICOs even more pronounced, namely, something called “misaligned incentives.”

One of the things that made ICOs so attractive to founders was the fact that they did not have to give up any equity in the underlying business. Although partially driven by greed, the main reason was to avoid the project’s tokens being classified as securities (a problem which, as you may recall, is made worse by IEOs given the Munchee decision discussed above).

If the purpose of not giving equity in the company to investors during ICOs, is to avoid regulators like the SEC, you may be asking, “What’s the big deal? The reason it is a big deal is because without equity in the underlying business, investors don’t actually care about the business. All they care about is the token. And there is no incentive to prevent them from dumping the token to make a quick profit, even if it kills the business, because they have no equity in it. These are the “misaligned incentives” mentioned above.

IEOs not only fail to fix this, but they make it even more pronounced by acknowledging that the token (by being listed on the exchange) is the only thing that matters. So just as in the case of ICOs, no matter how successful the IEO happens to be, the underlying business is pretty much guaranteed to fail.


IEOs may be an “evolution” of ICOs, but not every evolution results in a better outcome.

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‘nuf said

Are all IEOs bad? Not necessarily. In fact, our criticism is not even directed at those who choose to use an IEO as a fundraising method. But given the major issues we’ve outlined above we would encourage anyone considering it to think very carefully and please consult with an attorney first before you commit to anything.

Grant Gulovsen 高伟明 is a licensed U.S.-based intellectual property attorney whose practice focuses on advising individuals and businesses in the blockchain and cryptocurrency space. You can find him online at Gulovsen Law Office. Please note that portions of the above article are intended solely as parody/satire, designed to highlight the absurdity of what passes as “business as usual” or “best practices” in the cryptocurrency industry.

This article was kindly shared with ValueTokenized publication by Grant Gulovsen.

ValueTokenized is a tokenization educational resource.

By the way, watch our interview with Grant:

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