The global digital asset and cryptocurrency market is becoming increasingly prevalent in the world of investment and fundraising for both individual and corporate investors. Blockchain-based investment has seen rapid development over the last few years, and as such, mechanisms such as initial coin offerings (ICOs) and initial exchange offerings (IEOs) have become an increasingly popular means for achieving fundraising for blockchain-based projects.
Essentially, both mechanisms allow investors to acquire tokens in exchange for funding a project. While both act as fundraising options for token issuers, there are some fundamental differences between IEOs and ICOs that should be considered.
Initial Coin Offerings
What is an ICO?
An ICO is a way for project teams to raise funds to launch their cryptocurrency. Token issuers raise money by publicly selling their token in exchange for Bitcoin or Ethereum. Essentially, the process involves the ICO issuer selling the project’s coins to the public either before or during an update of a project or launch of a new project. Interested investors will buy coins, thereby funding the project, in the hope that the project is successful and will offer them long-term gains.
The fundraising is conducted by the project team themselves on a digital platform which allows investors to purchase the tokens as a part of a crowd sale.
Benefits and Limitations of ICOs
ICOs are a convenient and easy way for businesses, start-ups and individuals to access funding, as well as the cryptocurrency market. ICOs allow anyone to participate, making it an incredibly attractive investment opportunity for start-ups and individuals who have previously been unable to participate in the traditional initial public offerings (IPO), which are generally limited to accredited investors with a certain level of net worth.
Further, as ICOs are conducted by the token issuer themselves, there are no intermediaries or middlemen between buyer and seller. This is certainly an incentive for businesses wanting to simply and easily enter the market.
However, there are some major drawbacks in the ICO process. For individuals wanting to participate in new blockchain project token releases, the environment can be extremely high risk with a large number of scams and little regulation, as well as the environment being highly exposed to hackers. There have been many instances where individuals have accidentally sent their funds to the wrong wallet, and some cases where project teams have absconded with funds.
ICOs in Thailand
One of the biggest drawbacks of participating in ICOs is the high risk involved in transactions. This has been a growing concern for all jurisdictions in which cryptocurrencies operate. In Asia, Thailand was one of the first countries to address unregulated crypto exchange concerns, enacting the Digital Asset Act (the ‘Act’) in mid 2018. The Act governs all issues digital asset related, including the business activities in relation to digital assets, as well as the offering, purchase and sale of cryptocurrencies.
Of course, the Office of Securities and Exchange Commission (SEC) has been watching the rapid growth in the industry, and of ICOs in particular. Growth so much so, that ICOs have surpassed the amount of early stage venture capital funding in the country. Understandably, investor’s exposure to fraud or scam has been a concern of financial regulators such as the SEC. As such, in line with the Act, issuers are subject to certain regulatory requirements when participating in ICOs.
Those seeking to conduct ICOs in Thailand must:
✓ Register with the SEC;
✓ Hold their ICO via an SEC approved ICO portal; and
✓ Use an electronic system provider that facilitates the offering of digital tokens and will conduct due diligence on the tokens and issuers.
Following these steps allows the SEC to monitor both the token issuer and purchaser, and the sale of the token itself, ensuring accuracy of the documents involved in the transaction and reducing the likelihood of fraudulent activity.
Initial Exchange Offerings
What is an IEO?
An IEO is another form of fundraising event, administered and overseen by an exchange on their exchange fundraising platform. This allows users to purchase and receive tokens directly through the exchange from their own exchange wallet.
IEOs are currently relatively rare in the cryptocurrency world. In fact, IEOs are banned in a number of countries, including Thailand.
Benefits and Limitations of an IEO
Participants in IEOs are fully screened by the exchange platform. As the sale and purchase of the coin is to occur on the exchange, exchanges have a need to maintain their credibility and reputation via careful vetting processes of potential token issuers. Through this, IEOs are able to mitigate some of the dangers associated with ICOs, as scams are more easily identified and prevented. Consequently, participants in IEOs on exchange platforms are able to have a greater degree of trust that their money is in safe hands.
IEOs also create an ease of experience for their users. Participants need only have an account on the exchange and funds in their account, and they are able to fully partake in the exchange’s fundraising activities. Users are not required to manage on-chain transactions with a range of different wallets on different blockchain platforms.
One of the disadvantages of IEOs is that fundraising organizations are required to pay fees for listing and a percentage of their tokens to the exchange. However, most are happy to pay these fees, considering the exposure to the exchange’s large customer base, as well as the exchange doing most of their marketing, resulting in a much lower marketing budget than if they were to fundraise through an ICO. Additionally, having to focus less on the marketing and advertising to raise funds, means that project teams have more time to focus on the development of their product.
Conducting fundraising through an exchange platform reduces the token issuer’s need to implement vetting procedures on their clients (if they have capacity and ability to do this in the first place). In order to participate in IEOs, customers have to create accounts on the exchange platform. Most exchanges do their own KYC/AML checks on their customers when they initially make an account, meaning that the token issuer is free from this burden and does not have to worry about the crowdsale security during its fundraising process.
Once the crowdsale has been completed, generally the exchange where the IEO was conducted will list the coin on the exchange platform. For this reason, token issuers wishing to participate in an IEO are required to pay a listing fee, as well as a percentage of the tokens sold during the IEO. This can be a deterrent for some token issuers, as listing fees can be expensive and, in some instances, exchanges may take as much as 10% of the tokens sold during the IEO.
Participation in an IEO
In countries that allow IEOs, the process of participation is relatively simple. Those wishing to purchase cryptocurrencies in an IEO need only choose an IEO and exchange which is hosting a crowdsale and become registered on that exchange platform. This will include completing KYC and AML verification processes.
Once this is completed, the participant can fund their account with a coin accepted in the crowdsale and wait for the IEO to open so that they can buy their tokens.
IEO v ICO
While ICOs were the catalyst for the fundraising boom in the cryptocurrency market, many have suggested IEOs are the way forward. Despite IEOs being banned in a number of countries worldwide, experts in the cryptocurrency market are anticipating that IEOs may become the standard model for fundraising in the cryptocurrency space.
Having the projects backed by the exchange in an IEO creates a more secure, convenient process for investors. On top of this, there is less risk of fraudulent projects and scammers in an IEO compared to an ICO.
Thailand has overcome some of the issues associated with ICOs through the implementation of the regulatory framework governing the ICO process. The regulations have created a controlled and protected legal environment for ICOs by requiring an audit of each project, as well as mandating that the project team obtain a license from the SEC, which involves strict compliance requirements.
Nevertheless, businesses and individuals involved in the crypto arena should keep an eye on the growing space for IEOs and no matter which fundraising opportunity they choose to be involved in, ensure thorough research is conducted against the founder, exchange and project idea to protect against the possibility of scam.