Some of the biggest internationally operating crypto exchanges started recently to offer so called initial exchange offerings (IEO). For a couple of months now, interested companies can procure funds through this new blockchain funding method by publicly offering their blockchain tokens on platforms like Binance Launchpad, KuCoin, Bittrex IEO, Huobi Prime and OK Jumpstarter. By now some new tokens have been issued and sold to investors via Initial Exchange Offerings. Veriblock, MultiVAC and Matic can be named as exemplary IEO projects. But are IEOs actually a new form of token emission? And if so, what exactly is the difference between initial exchange offerings on the one hand and Security Token Offerings and initial coin offerings on the other?
CRYPTO EXCHANGES AS CENTRAL EMISSION AND SALES PARTNER
The essential difference to the known funding methods of STOs and ICOs is that in an initial exchange offering, a crypto exchange acts as the central emission and sales partner of the emitter. Potential issuers being interested in an IEO for their project firstly need to apply to a crypto exchange that offers IEOs. If the emitter and the exchange come to an agreement regarding the token emission the public offering of said token will be conducted via the crypto exchange. This holds the advantage for the issuer that his token will be listed on this crypto exchange after the IEO is completed. This in return means that the secondary trading of the token after the IEO is immediately possible via the platform of the partnering crypto exchange. Furthermore, the IEO exchanges provide a substantial reach for the issuer and can advertise the token sale to their customer base. This can certainly have positive effects on the sales success of the IEO.
WHAT KIND OF TOKEN CAN BE OFFERED VIA AN INITIAL EXCHANGE OFFERING?
An initial exchange offering is generally conceivable for any kind of token. Most of the projects so far offered – not unlike ICOs in the past – were based on utility tokens anyways. These tokens do not grant their owner any participation rights but instead are usable within the emitter’s business model. It is possible to issue security tokens via an IEO, if the stricter regulatory requirements that are applicable to securities are fulfilled. Most securities cannot be publicly offered without a prospectus that is approved by the competent supervision authority. Furthermore, the IEO platform itself also has to fulfill stricter regulatory requirements for the listing of security tokens in contrast to the listing of utility tokens. In accordance with the EU Prospectus Directive not only the emitter of the security tokens but also the IEO platform might be viewed as the issuer of the token and therefore as responsible entity for the securities prospectus. Moreover, EU securities regulatory law, especially MiFID II and MiFIR, is applicable in this scenario. This is most likely the reason why utility tokens right now, after their loss of significance in 2018, experience a renaissance and why security tokens have mostly not been offered via initial exchange offerings, at least not in the regulated jurisdictions.
CAN AN INITIAL EXCHANGE OFFERING BE OF INTEREST FOR EMITTERS?
The advantages of IEOs for emitters are obvious. Startups thinking about conducting an IEO should however carefully consider the fact that a utility token might not be the best funding method for their needs. Many of the former ICO investors are still frustrated by the disappointing performance of utility tokens that they invested in. So, on the one hand it seems questionable that they would invest again in a utility token and on the other hand a utility token with a very limited use case and a bad performance might tarnish the reputation of the emitting startup.
ARE SECURITY TOKEN OFFERINGS WITH PROFESSIONAL ADVISORS AND SALES PARTNERS THE BETTER ALTERNATIVE?
If a security token offering with professional counselors, programmers and sales partners is the better alternative to an IEO via a crypto exchange is the subject of debate. The decisive advantage of STOs from the investors point of view is the transparency that comes with the fulfillment of the regulatory requirements, especially with the creation, official approval and publication of the securities prospectus. For new blockchain projects that want to establish a foundation and collect funds for the financing of the technological development of their new technology through the public offering of their coins, an IEO with a crypto exchange as a partner might be a valid alternative.
Attorney Lutz Auffenberg, LL.M. (London)