What is IEO?

As the cryptocurrency industry continues to evolve as a viable alternative to traditional financial institutions, understanding what is IEO (Initial Exchange Offering) has become vital for startups seeking efficient investment-raising methods. This article provides a comprehensive overview of the IEO tool, which enables companies to issue in-house currencies exchangeable for popular cryptocurrencies like Bitcoin and Ethereum. By utilizing a cryptocurrency exchange as a trusted intermediary, the process offers a layer of security through mandatory legal due diligence, while investors gain tokens that provide access to services, discounts, or preferential rights.

The analysis breaks down the three basic phases of a launch—legal due diligence, the sale process including AML and KYC procedures, and the final crediting of funds—while highlighting critical challenges such as high exchange fees and the risk of tokens being classified as securities. Understanding these nuances is essential for any project aiming to navigate the complexities of digital fundraising without falling foul of global regulators. Whether evaluating the need for “mass investors” or considering private sale alternatives, this guide offers the legal and strategic insights required for success in the blockchain space.

What is IEO?

IEO (Initial Exchange Offering) is a tool enabling startups to issue their own in-house currency exchangeable to popular cryptocurrencies such as BTC and ETH.

A company receives BTC or ETH while investors get tokens which can subsequently acquire various properties. Token properties define its value which may take on the form of discounts for goods, access to miscellaneous services or preferential right to buy goods. Tokens are traded at the exchange acting as a trustee.

How Does One Launch an IEO?

The IEO launching mechanism involves 3 basic phases:

Phase #1: the exchange performs legal due diligence and eliminates fraudulent projects.

Of course, there is a risk of malpractice on the part of the exchange which may collide with creators of a fraudulent project. If you intend to do the IEO, you need to choose a reliable reputed exchange.

Phase #2: the exchange sells tokens on its website and performs necessary AML and KYC procedures.

Any investor willing to participate in the IEO must go through the exchange’s verification process. It includes the provision of the scanned passport and confirmation of residence. The place of residence is usually confirmed with a bank statement regarding utility payments.

Phase #3: money is credited to the issuer’s token account.

In this phase, the responsibility for the investor’s funds security passes from the exchange to the token issuer, i.e. the company performing the IEO. So where there is an issue of expediency of using the funds, the exchange is only exposed to reputational risks.

Finding the right investor is not an easy task so one should take good care evaluating the need of attracting the “mass investor”. Private Sale, where the company’s virtual currency is sold to a limited number of investors, is one of the alternatives to IEO. Telegram with its in-house TON currency is one of the successful examples of fundraising via Private Sale.

SBSB Legal Firm has an extensive portfolio of successful IEO launches. Our lawyers will be happy to advise you on all IEO-related matters.

What are The IEO Challenges?

We have highlighted key challenges which may come up during the IEO process:

1. High exchange fees which depend on the project risk. Those are payable for the token exchange listing and may amount up to 20 BTC.
2. Only verified investors may participate, and the verification procedure may take 1 to 30 days. Investors wishing to remain anonymous cannot launch the IEO.
3. There is no guarantee that the company will raise the required amount for the IEO. If the amount is not raised, the investors will get a refund but the company issuing the tokens will incur substantial losses.
4. There is a risk that your token will be recognized as security. One needs to adopt a comprehensive approach towards this matter and make sure to have a legal opinion confirming that the token is not a security. Otherwise, one may be in trouble with regulators.

We advise you to consider IEO as an alternative method of investment raising. Those planning to launch the IEO would benefit from referring to professionals. SBSB will help facilitate and accelerate the IEO launch. We offer end-to-end legal support and Private Sale services, and we also have reliable exchange partners. Join our Telegram chat for a free online consultation.

Stay informed with the latest legal developments at Global Law Experts