An Initial Exchange Offering (IEO) is a token offering event which involves the use of a centralized cryptocurrency exchange (CEX) to perform fundraising functions for a new blockchain project. Project teams leverage large CEX user bases to raise money to kickstart their projects before listing their token for trading on the CEX.
With an ICO, IEO investors can buy digital assets before they become available for trade on the market. The exchange facilitates the token sale by registering users who provide their KYC information and are then able to buy tokens before they start trading on the open market. Because an IEO is facilitated by a CEX which typically have stringent requirements, the startups opting to fundraise through IEO have a well-developed roadmap. In most cases, the IEO proposal is rigorously reviewed by the CEX because in many ways, the exchanges put their reputations on the line with each IEO they offer to their users.
Fundraising through an IEO lends a certain level of credibility to startup projects as investors often feel assured that each CEX has performed adequate due diligence before agreeing to host the project for IEO.
How does an IEO work?
There are thousands of crypto startups and companies which are competing to acquire potential investors through token offering events. To separate themselves from the competition, crypto projects that want to organize an IEO must first undergo stringent procedures well before the first dollar is raised.
For the project's team, several requirements must be met before the CEX agrees to list the project for an IEO. Having a dynamic business model, well-designed tokenomics, experienced team members, a viable use case for the technology, and a whitepaper are critical. Organizing an IEO is akin to stating that the team is committed to the long-term success of the project.
The team must determine if their IEO will have a hard cap or soft cap. A hard cap ensures that no more than a certain amount of money can be invested. A soft cap sets an initial goal to be reached but allows for more investments to trickle in afterward. Alternatively, the project and the CEX may determine a timeframe for how long the IEO will be active. Once these decisions are made, the project and the CEX will be ready to host the IEO.
Almost all CEXs host IEOs nowadays. They have proven to be a very effective means of fundraising for projects and a profitable investment channel for prospective investors.