Are initial exchange offerings still a thing?

The initial coin offering (ICO) craze died more than a year ago. Meanwhile, the ICO's proverbial cousin, the initial exchange offering (IEO), is alive and kicking — despite being in the midst of a long slump.

At least, that is apparently the view of Sam Bankman-Fried, founder and CEO of crypto exchange FTX. Why else would FTX be interested in starting its own IEO service?

First made popular by Binance, IEOs help crypto projects to raise money by listing their tokens directly on crypto exchanges. ICOs, on the other hand, were managed by the startups themselves. Bankman-Fried told The Block that FTX wants to use the approach to “launch tokens we are excited about.”

"Our goal is to launch projects that have some unusual use case or some integration with FTX," he said, adding that the exchange would primarily look at projects with whom it has worked with, and coins that it understands and are "more than just vaporware on an ERC20 skeleton." 

FTX would be entering a crowded market. Though IEOs have slowed to a crawl this year, more than 30 crypto exchanges still offer IEO platforms, including big players like Binance, OKEx, Huobi, Bitfinex, Bittrex, and KuCoin. 

But Bankman-Fried doesn’t plan on copying the existing IEO playbook, he said. In the standard exchange offering, the token is initially sold at a cheap price. "We're going to take a different approach,” he said. “If there is cheaper selling pre-launch it'll be associated with a lockup and meant for people interested in holding the token."

FTX also won't charge anything, said Bankman-Fried. The Block can confirm that Binance has taken a small percentage commission from previous IEOs, though the exchange declined to comment for this article. OKEx does not charge, but all of the other exchanges named above either declined to answer or didn't respond to The Block's questions about whether they charge to facilitate IEOs.

Bankman-Fried said that FTX is in talks with "a few" projects, but that nothing has been finalized yet. It could take one to two months, he said. "It's probably going to start more as a test to see how it goes."

Perhaps FTX's tweaks to the IEO model can revive the slump. But the truth is that whether IEOs have a future is not just up to crypto exchanges and investors. Regulators will have a say, too. And based on how they treated ICOs, it is hard to think that the future of the IEO is anything but uncertain.

IEO slump

According to The Block Research, about $174 million has been raised through IEOs since 2019. But after gathering some steam early last year, their popularity fizzled as 2019 came to a close. There haven't been any notable IEOs this year, and as shown in the chart below, the overall trend has slowed significantly.

There are at least two big reasons why startups aren't raising funds via IEOs, experts say.

First, the performance of most IEO tokens has been negative. According to The Block Research, out of 45 IEOs that took place from 2019 to date, 29 are trading below their issue prices. Sixteen of them have lost more than 50% of their value from their issue prices, and the median return of these IEOs is -27%.

Returns have mostly been negative because "many tokens sold through IEOs have lacked clear metrics for fundamental value," Brant Downes, research analyst at token sale activity tracker Smith and Crown, told The Block. "This has made it difficult to sustain the often lofty values these projects achieved at the time of their IEOs."

The second key reason is that many tokens are now launching on non-custodial automated market-maker (AMM) exchange protocols like Uniswap instead of centralized exchanges. “This is a trend I see continuing," Joey Krug, co-chief investment officer at Pantera Capital, which once invested in IEOs, told The Block.

Dead or alive?

Not everyone has given up on IEOs. The IEO trend "will come back," Sandeep Nailwal, co-founder and COO of Matic Network, told The Block. Matic raised $5 million via an IEO on Binance last year.

OKEx CEO Jay Hao told The Block that the decline in popularity of IEOs doesn't mean they have died, but is instead a "sign of the true maturity of IEOs." OKEx facilitates IEOs at a monthly frequency and is set to announce its next project later this month, said Hao.

Last September, it appeared that even Coinbase was considering the launch of an IEO platform. The exchange hasn't revealed any further details. 

Bobby Ong, co-founder of CoinGecko, which used to track IEOs, told The Block that Coinbase might be wary of the increased regulatory scrutiny that would likely come along the move. Coinbase did not respond to The Block's requests for comments.

Indeed, the question of whether IEOs have a future may boil down to whether regulators decide they do.

While the concept is "interesting," it needs to be rightly executed from structural and legal perspectives, Andy Bromberg, co-founder and president of token-listing platform CoinList, told The Block. "First, a reasonable regulatory structure for IEOs needs to be worked out in any jurisdictions they are happening,” Bromberg said. "Not enough work has happened on this front yet." 

In January, the U.S. Securities Exchange Commission warned investors to “be cautious if considering an investment in an IEO,” adding that "IEOs may be conducted in violation of the federal securities laws and lack many of the investor protections of registered and exempt securities offerings."

Some observers say that IEOs are so similar to ICOs that they are doomed to suffer the same fate.

"IEO facilitators and intermediaries such as token platforms and promoters are trading securities for compensation, and would likely need to comply with the SEC's broker-dealer registration requirements," John Reed Stark, a former SEC lawyer and now president of cybersecurity consultancy John Reed Stark Consulting, told The Block.

"It's almost insulting," Stark continued. "IEOs represent yet another blatant attempt to hijack a similarly sounding acronym — 'IPO' — in an effort to lure investors seeking to get rich quick. However, just like ICOs, IEOs have not a single element in common with IPOs."

"IEOs and ICOs are exactly the same things. They both are a token launch," Aleksander Nowak, founder of crypto exchange BlockEx and a self-proclaimed 'IEO Pioneer.' "Unless the launch venue has a license to offer securities then the exact same issues that occurred in case of ICOs will be present for IEOs."