Disclaimer: This is guest post by Andrey Sergeenkov.
2017 was the year of the ICO. It’s estimated that over $5.6 billion was raised spread across 913 different projects. That’s a lot of money but as it turns out, a not insignificant amount of it went to funding poorly executed projects and in some cases, outright money grabs. Since 2017 hundreds of projects have failed and thousands of investors have lost their capital. Not only that but the SEC has been cracking down on ICOs leading to heavy fines and in some cases, a forced return of money raised.
All of that has led to ICOs incurring a bad name in the cryptocurrency sector. Blockchain startups however still need to raise funds and the solution is the Initial Exchange Offering. These are promising to create a better cryptocurrency marketplace and the following are three things that IEOs are doing right that ICOs did wrong.
1) Ensuring Only High-Quality Projects Get Funded
The problem with ICOs was that anyone could, and did, raise funds. For example, the creators of the FUEL token used the proceeds of their ICO to purchase a pair of Land Rovers and lease a Lamborghini. It’s not clear whether they ever had the intention of seriously developing the coin. This is just one instance among many of people raising money who never should have in the first place. IEOs are changing that.
“Exchanges can also provide a strong vote of confidence for any project they support, for example Binance has a rigorous evaluation process for selecting the projects that it will conduct an IEO. That dramatically reduces the risk that a project doing an IEO is a scam or incompetently managed, which makes it a safer investment choice.”
2) Providing Immediate Liquidity for Projects
In the past it was relatively easy for founders to get their coins onto a lesser-known exchange, like Huboi or KuCoin, however, many ICOs ended up having to pay millions of dollars to get listed on first tier exchanges like Binance. That meant that the determiner of a project’s success wasn’t always the quality of the technology but whether or not the project was listed on an exchange.
IEOs are different. As Boytsov points out, “by already having the assurance of liquidity on a major exchange before the IEO even starts, investors can feel more confident in buying based on the other significant factors they take into consideration.” This guaranteed liquidity is a major advantage of the IEO model and it’s also a relief to investors who no longer have to worry that the coin they’ve invested in will fail because it can’t afford to pay to get listed on an exchange.
3) Enforcing Proper KYC
Finally, as most exchanges already have client information on file it’s much easier for them to do proper KYC and ensure that only qualified investors can take part in a project. For example, due to concerns about the SEC classifying their coin as a security, some ICOs may not want to sell to Americans. When they get their funding through an exchange the exchange can make sure no Americans invest and the entire process is easier than the sloppy or nonexistent KYC that many ICOs were known for.
This is helpful not only to the person investing, they don’t have to worry that they’re buying a coin that they’re not legally allowed to own, but helpful to the coin’s founding team as well. There has been a growing number of cases where the SEC has forced founders to return funds to American investors and/or pay a fine. By barring certain investors a project’s team doesn’t have to worry that they’ll be on the wrong side of regulations.
The Way Forward
The cryptocurrency space is changing and although there are still ICOs raising money, many people believe that IEOs are going to be the dominant fundraising method in the future. For those founders with a good product and a real roadmap, they simply offer too many advantages over ICOs. It will be interesting to see how popular IEOs prove to be in the coming years and whether they phase out ICOs altogether.
About the Guest Author:
- Andrey Sergeenkov
- Independent IEO Advisor
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