• Dr. Roee Sarel

"The king is dead! long live the king": on IEOs, STOs, and ICOs.

The roller-coaster in the world of crypto-currencies seems to be a never-ending ride. After the 2017-2018 boom of ICOs, and the big crash of 2019, the king of fundraising in the blockchain sphere - the ICO - seems to be dead. Yet, new monarchs have arisen - the initial exchange offering (IEO) and the security token offering (STO). A quick background for those new to the concept (if you are familiar with the topic, feel free to scroll down a bit): the emergence of blockchain technology has granted companies with a new fundraising tool: selling of crypto-tokens. There are many advantages to this tool, but perhaps the most conspicuous advantage is a timeline reversal: In the past, startups could only get substantial funding (e.g. from a VC) if they could show that they have an advanced product and existing revenues. With token sales, the timeline reversed: first a large amount of money is raised, then the product is completed and revenues begin. While this format exists also with regular crowd-funding (e.g. kickstarter) the scale was much larger with ICOs. ICOs became extremely successful, but alas, many dubious projects came to light and an opposition, bad publicity, regulation and other factors have all slowed down (and mostly eliminated) the use of ICOs during 2019.

At the same time, a new tool emerged: the IEO. In IEOs, tokens are sold - just as in ICOs - but the framework is managed by a crypto exchange, which then usually commits to listing the token also for trade after the sale. Quickly, IEOs began raising substantial amounts - about 262 million US dollars in Q2 2019.

The appeal of IEOs seems clear: First, as ICOs are no longer "trendy", IEOs serve as a close substitute. Second, one problem with ICOs is that anyone can launch a sale, so that there is even no guarantee that the seller isn't fake. With a middle-man (an exchange), at least there is some certainty that the project really exists. Along similar line, as exchanges take a percentage fee, their willingness to accept a project is a signal of quality. Third, IEOs may have some regulatory advantages: if the exchange correctly identifies the (ever-changing) legal limitations in the crypto market and implements an appropriate screening process, the corporations launching an IEO can protect themselves against legal mistakes. Fourth, after an IEO, the token is usually directly tradeable, which provides liquidity.

On the other hand, IEOs do not overcome all of the problems that ICOs have. For instance, one difference between ICOs and IPOs is precisely the fact that IPOs are highly regulated, which may help protect investors if the legal requirement promote efficiency. Moreover, an IEO does not necessarily change the nature of the token - if a token doesn't give real value, it will no matter how it is sold.

At the same time, security token offerings (STOs) - which are the regulated version of ICOs - have also began raising substantial amounts and also pose a potential substitute.

The key question that startups who are thinking about launching a token are facing thus seems to be as follows:

- Running an ICO, which is very risky, as this is an outdated tool that is expected to fade away. There is no clear advantage to it, other than avoiding the need for cooperation from an exchange during the launch (after the launch, most companies want to register their tokens for trade anyway).

- Running an IEO, which is less risky, as it allows for more flexibility. In particular, if the token being launched is a utility token, an STO seems redundant. However, as the regulation around the world changes all the time, it is still somewhat unclear what exactly is the level of exposure that startups take when opting for an IEO.

-Running an STO, which bears much less risk, as regulators approve the sale. However, as with IPOs, an STO is costly due to the regulatory requirements.

The question thus seems to be: how should a company decide which path to take? can you think of clear guidelines on this?

(Needless to say, but this blog post does not constitute any type of legal or financial advice, and is only aimed as a basic overview).

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