The crypto VC financing has gone through tremendous changes in the past years. From the traditional IPOs — available only to hedge funds or VC funds — to ICOs, STOs and, last but not least, IEOs.
Initial Coin Offerings (ICO)
The ICO market started off in early 2014 with the initiation of the Ethereum blockchain and reached the peak of its popularity only in late 2017 when major cryptocurrencies such as Bitcoin and Ether eventually filled the media headlines.
Before the ICOs, only hedge funds, private investors or traditional venture capital funds were truly privileged to participate in the early-stage investing in new projects, called the IPOs (Initial Public Offerings).
The ICOs then created a new path, enabling all investors (accredited or not) to partake in the early-stage crowdfunding, even with smaller funds. It was fast, attainable, and (in some cases) very profitable. To give you an idea of the profits, here are the ROIs (Return On Investment) of three projects that had their ICOs in 2017:
However, the ICOs did come with their own drawbacks. The main issue was the lack of any regulatory oversight. This created a market full of over-promising results, confusing and over-technical jargon, Ponzi schemes, and other forms of fraudulent ICOs, poor reporting, investor manipulation, etc.
Still, the “get-rich-fast” sentimentality of investing in ICOs was too tempting, luring investors into overlooking the traps.
Some of the major ICO scams which stole millions from investors are now being prosecuted by the authorities. Yet with thousands of ICOs that existed in 2017 alone, the majority of the stolen money will likely never be recovered.
Learn more about ICOs and their traps in our ICO Investing 101 blog series.
Security Token Offering (STO)
In mid-2018, when the cryptomarket was already in a clear downtrend, ICOs were also losing demand, however, some new projects were still being launched. At that time, the SEC and the CFTS started to pay more attention to ICOs and aimed to classify them, based upon what the projects offered their investors:
Utility tokens — representing the right to use the product or service once the project is launched. These are not considered as investments.
Security tokens — representing ownership of the project, similarly to being a shareholder of a company. These are considered investments and are subject to federal regulations.
The second classification pushed some ICOs to shift to a new kind of token offering, called the Security Token Offering (STO). ICOs and STOs are basically the same, wherein the STOs primarily strive to get registered and approved by the SEC and to follow their regulatory guidelines.
Initial Exchange Offering (IEO)
The Initial Exchange Offerings (IEO) or the Initial Exchange Coin Offerings (IECO) are a new breed of ICOs. They took off in late 2018, along with major exchanges pushing for stricter KYC and AML procedures on their platforms. One of the first to launch its own platform for the IEOs was Binance.
Up until today, several other exchanges have offered IEOs on their platforms:
The IEOs come with several advantages compared to ICOs or STOs. First off, investors who are already registered with one of these exchanges, do not need to comply with any additional KYC or AML procedures which are normally required when investing in ICOs or STOs. Furthermore, investors do not need to withdraw their funds from the exchanges and risk losing them in the investment process.
These projects have to adhere to the exchanges’ rules and policies, and also pass their thorough screening systems. They need to provide several applications and documents. This process is yet another benefit for investors since it manifests that the team behind the project is serious about it. The projects that have successfully applied for the launchpad, gain the full exposure to the user base of the exchange. For example, a project called BitTorrent had its token sale in January 2019 on Binance Launchpad and successfully raised $7.2 million in less than 15 minutes.
Exchanges offer new investment opportunities to their customers, attracting new potential clients. Exchanges also tend to require that the IEO sale is done through exchange’s own tokens, boosting their utility in return.
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DISCLAIMER: This article is for informational and discussion purposes only and does not constitute a marketing message, an investment survey, an investment recommendation, or investment advice. The article was prepared exclusively for a better understanding of market dynamics.