Sara Leka

Legal Associate, E&S Group

Initial Exchange Offerings: increased investor confidence and transparency

Tuesday 17th December 2019

Initial Exchange Offerings (IEOs) are currently one of the means of fundraising in the fintech industry. Exchanges play an important role in the growth of cryptocurrencies and IEOs have been one of the first alternatives to challenge Initial Coin Offerings (ICOs).

An IEO is a token sale conducted over a cryptocurrency exchange. Contrary to an ICO (where the project team conducts the fundraising through the issuance of tokens themselves) the fundraising for an IEO is conducted on an exchange’s fundraising platform.

IEOs are usually considered as a fairer playground, both for new investors and startups looking for funding, becoming one of the most important means of raising funds for blockchain start-ups. The main role of the exchange is to assess the new projects and their investment prospects, risks and also viability. In case of IEOs, the exchange shares the reputational risks, which increases investors’ confidence in the placement because the exchange is staking its reputation behind the crypto project.

Compared to ICOs, there are a lot of benefits for projects that opt for an IEO. Investors are more confident that the project will not disappear once the fundraising is completed. Arguably, exchanges represent a defense against scams because they would have diligently studied the project before accepting it. This means that IEO project teams are neither anonymous nor fake, so there is less chance that they disappear after collecting the funds. During an IEO, the token purchase process is typically straightforward and usually no additional fees are incurred.

Additionally, IEO are followed by the listing of the project’s token on the same exchange within a few days of the conclusion of sales, providing liquidity to investors. This solves one of the common problems of ICOs, where some of the projects do not manage to list their token on an exchange. Transparency is another important feature with regards to IEOs. The price of tokens is set prior to the token listing and it will typically remain fixed during the IEO phase. In this way investors can see exactly what they are getting for their investment.

Apart from these advantages to investors, there are also a lot of benefits for the projects themselves. Exchanges allow only verified investors to participate in the IEOs. In fact exchanges usually take care of all KYC processes on behalf of the project. This of course alleviates some of the burden off the promoters of the project. Moreover, the project team can afford to dedicate less time and energy on marketing and associated marketing expenditure. This allows the developers of a promising project more resources to focus better on their core business activities.

Projects which are listed through an IEO also benefit from the credibility of the exchange, a larger exposure and interest in the project, and possibly a speedier fundraising process.

IEOs of virtual financial assets conducted in or from within Malta fall to be regulated by the Virtual Financial Assets Act and the relevant regulations enacted under it. Essentially, this would trigger a number of obligations and requirements under the VFA regulatory framework. This includes the registration of a whitepaper with the MFSA, as well as the appointment of a number of functionaries (such as a systems auditor and a VFA Agent) which ensure the smooth running of the whole operation as well as ensuring a significant degree of investor protection.

Having said so, nowadays the trend is shifting towards the identification of new fundraising solutions which ensure privacy, custody and more regulated security tokens. The future is indeed interesting.