After the collapse of ICO (Initial Coin Offering), IEO (Initial Exchange offering) have become quite popular in the cryptocurrency world. In IEO, the tokens are not directly sold to the investors. The tokens are listed on exchanges for the investor to buy. It was introduced to reduce the risks of fraud and scam, which was the reason for the downfall of ICO.
Parties Involved In IEO
Unlike ICO, there are three parties involved in IEO. They are as follows,
- Token Issuers: It is the issuing company who wants to raise money for their project. It can be a company or an individual. They have to list their tokens on exchanges so that the investors can buy the tokens and help raise funds required to start the project. Most of the projects are start-ups as there are no restrictions on raising funds.
- Exchanges: They are the link between token issuers and investors. In ICO, there are no exchanges. The exchanges list the tokens and help the issuer to raise money. Most of the work is done by exchanges. They receive listing fees in return. Exchanges make the whole process much safer for the investors and reduce the burden of the token issuers.
- Investors: Investor is those who buy the tokens which are listed on exchanges. The investors have to make the payment in the form of cryptocurrency. Investors prefer IEO, as it is safe and trustworthy. They have to fill in KYC forms with the exchanges in order to buy the tokens.
IEOs are trustworthy but not entirely safe. There are various risks and liabilities involved in raising funds with IEO.
Risks and Liabilities faced by the Token Issuer
Many people think the issuing company is always safe and less prone to risks, and it is still the investors who face scams and frauds. But in IEO, even the token issuer face various risks while raising funds. Some of the risks and liabilities faced by the token issuer are,
- Listing Fees: If you think you can simply list your tokens and get funds, you are absolutely wrong. The token issuer has to pay listing fees to the exchange in order to list the token. Sometimes when the project is unable to raise funds, the token issuer has to bear the loss of listing fees.
- Marketing Fees: The token issuer has to pay an additional marketing fee to receive IEO development services when they need additional marketing or consultation or different IEO solutions. Sometimes when the project is unable to raise funds, the token issuer has to bear the loss of marketing fees.
- No Guarantee of success: Even though the exchange helps the token issuer in raising funds, there is no guarantee that the goal will be achieved. Exchanges don’t guarantee the success of the project. In the end, the token issuer is the one who will incur the loss.
- Regulation issues: IEO face various regulatory issues. It has evermore been a subject of deliberation. The token issuer has to be very careful while dealing with regulation as one slight slip up can lead to legal issues. Many people say that it will face the same regulatory issues faced by ICO.
- Hackers: Nothing is ever foolproof. Hacking is not a new thing in the cryptocurrency world. The fact that everything happens online put everything at a higher risk. Although it is difficult, hackers can still hack the system and commit theft. The issuer has to face the consequences in the end.
- Legal Issues: In some countries, there are different laws pertaining to IEO, hence the issuer has to be very careful while targeting the market and audience.
- Tax compliance: When the jurisdiction changes, the laws related to IEO changes. Because of this, the issuer can sometimes face tax compliance issues.
- Structuring Problems: The issuer has to decide the structure of the project or company very carefully. Structural problems soon become legal problems.
- Token Issues: If the token is a utility token and treated as a security, the issuer will face legal charges. It is not allowed to trade securities in IEO without license and governance.
Risks and Liabilities faced by the Exchanges
Being a middle man is not an easy job. Most of the risks and responsibilities are transferred to exchanges in an IEO.
- KYC issues: The exchanges have to deal will KYC compliance of the investors. This risk is transferred from the issuer to the exchanges. KYC ensures that the investors are genuine and not frauds. It becomes a hassle for exchanges if there is even a slight problem with KYC compliance.
- Reputation on stake: The exchanges represent both the investors and token issuers. If there is an issue on either side, the reputation of the exchange will be at risk.
- Legal Risks: Sometimes, when the tokens are treated as securities, exchanges have to obtain a license and comply with securities Act. If there are jurisdiction issues, the exchange will face legal risks.
- Hackers: If there is ever a hacking scam with either party, the reputation of the exchanges will be at risk. No one will list their token with such exchanges. People will lose their trust.
- Regulation issues: Exchanges can face regulation issues if there is a scam or fraud. The cryptocurrency market is not regulated, so there are various regulation risks involved.
- Lack of Projects: If there are no projects available to be listed, there will be no business for exchanges.
- Fewer Investors: If there are fewer investors available with the exchanges, no one will want to list their projects with them. Eventually, the exchange will lose business.
These are the risks and liabilities involved in raising a fund with IEO. There are two parties involved in raising funds with IEO, i.e. token issuer and exchange. The investor is only responsible to invest their money. There are several risks, and issues face by both token issuers and exchanges. The token issuer can reduce the risks by availing IEO consulting services and IEO development services. The IEO Launch services can help create trust amid the exchanges and also the investors who can now rely on the goodwill of the launching company. The exchanges, on the other hand, should comply with the rules and regulations to minimise risks.