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IEOs – ICOs redux! Plus Ca Change

TLDR; Summarizing our longish post…..
-IEOs are the new ICOs. Expect a surge in such capital raises
-Win-win for the established exchanges and the projects. Former has a captive user base that wants to chase ‘hot’ deals, and the latter does not have to worry about distribution and PR as they used to have to in the earlier ICO iteration
-It is also a nice way for the exchanges to drive value for their native exchange tokens – such as BNT for instance, which has tripled in value in the past few weeks
-Exclusively an Asian phenomenon; In other words, coinbase etc will probably not jump into this any time soon ( Would coinbase acquire something like Coinlist or Harbor though?)
-The new SEC guidelines on interpreting the Howey test could be a tricky one, further queering the pitch for token issuance, especially in the US, and in general around the world

To many crypto enthusiasts, all the aspects of the 2017-18 ICO craze still remain fresh in their memories – the good, the bad, and the ugly, to throw in a gratuitous sphagetti western pastiche of a cliche. Initially viewed by many as an alternative, more democratic, capital raising mechanism to the access-based, concentrated nature of VC investing, the lack of regulatory oversight and proper vetting resulted in the vast majority of ICOs being outright scams. This resulted in huge losses, especially for retail investors as everyone raced to jump on the ICO bandwagon;scant attention was paid to diligently evaluate the value proposition of the underlying token, and as Nic Carter explained in this popular post, VCs, funds and other ‘early-access’ investors were equally complicit in pump-and-dump schemes which left the average retail investor holding the bag. To many outsiders, the VC-disrupting, rentier-eliminating promise of ICOs was quickly overshadowed by the rather unsavory reality that we witnessed.

Following the meteoric crash in crypto prices through 2018, the ICO bubble quick deflated almost as fast as it had grown in size during the previous bull run.  Rummaging through the debris left behind in the wake of the ICO bubble, we can identify several flaws in the way most of the ICO projects went about their capital raising processes. First, the overwhelming demand for ICOs caused congestion in the Ethereum blockchain on multiple occasions. Second, investor disclosure standards were far below par and beyond pathetic; all you needed was a white paper and a slick website (even a half-cooked one worked sometimes) to raise money.        

Fast forward 12 months, we are seeing the first signs of a resurgence in ICOs, albeit in a slightly different avatar called “IEOs” this time around, with infrastructural support from leading centralized exchanges. In contrast to the previously known ICO model, the IEO (Initial Exchange Offering) model of capital raising aims to address some of the former’s shortcomings and pitfalls. IEOs offer developer projects the opportunity to tap into the exchange’s existing user base and also allows them to focus more on project development and spend less resources on the sales, marketing and distribution part of a token offering. Centralized exchanges can to a certain extent also solve the Sybil attack problem where ICO investors resorted to creating new addresses to evade the contribution limits that ICO teams imposed on the ICO subscribers, as the cost of creating multiple trading accounts on a centralized exchange is much higher than just creating a new Ethereum address. By taking the token sale off-chain, centralized exchanges can handle much more traffic and demand as opposed to an onchain token offering process that more often than not results in network delays and frequent frustration for ICO investors due to the sudden surge in onchain activity during the token sale process. As exchanges provide listing guarantees for tokens offered through their IEO platform, investors will also benefit from the immediate liquidity on centralized exchanges for their purchased tokens. (This however is a bad signal, as we saw with ICOs; when an investor wants to dump as soon as a token lists, what does that say about the token and the team, and more importantly, what does that say about the investor. It is no wonder that the public markets have a 6-month lock-in for most investors post an IPO).

What is not clear however is this – do the vast majority of tokens that exist really need to exist? Do they really serve a purpose other than enriching the ICO/IEO promoter’s wallets/accounts. Irrespective of whether you call it an ICO or IEO this question is still the critical unanswered one in most crypto projects. As the SEC pointed out in its just-released DLT (Distributed Ledger Technology) framework or digital asset framework around guidance and interpretation of the Howey Test, and as the SEC division of corporate finance responds to a no-action letter on a proposed @turnkeyjet token sale, just this one clause could make most token offerings securities.

“the asset is offered and purchased in quantities significantly greater than any user would reasonably need, or so small to make use of the asset in the network impractical.”

Satoshi&co will personally, physically deliver a bitcoin per instance to any reader who can offer verifiable proof of an instance where they did the math on how many tokens they would need to fulfil their ‘utility’ needs in a network, while bidding for tokens in that network’s token sale/ICO. Effectively, this one rule could potentially make every single ICO/token sale out there a security as per the updated guidance on Howey test implementation.

Conspiratorially speaking, one sometimes wonders if these lawyer types, who any ways keep flitting between bodies like the SEC and the private sector back and forth, especially in the US, intentionally exploit ambiguities in the written word to keep themselves in business. Put in a clause in one section, put in a contradicting, but highly ambiguous clause in another which is open to interpretation, repeat ad nauseum..come to think of it, lawyers are the original arbitrageurs, they are arbitraging ambiguity & interpretational asymmetry even more than information asymmetry.

What is even more interesting is this. You have the fast-and-free nimble Asian exchanges and you have the highly regulated US exchanges. Especially given the higher regulatory hurdles in the US, it is no wonder that Asia is emerging as the epicenter of the crypto world.

Meanwhile in Crypto Wonderland….

“Celo Raises $30 Million from Eminent VCs” Blockchain payments startup Celo has raised $30 million from well-known crypto investors Polychain Capital and Andreessen Horowitz. Celo, which is the trading name of A Protocol Inc., plans to use an in-house digital token and stablecoin to facilitate cross-border payments, primarily focusing on the unbanked using smartphones. Having raised $6.4 million in previous cash injections, the company is now conducting pilot-phase tests in Argentina.

“Riot Blockchain’s Stock Price is Soaring High” As Bitcoin’s sudden rally higher captures the world’s attention, it is not only the cryptocurrency investment that is racing back into the light. Any company associated with BTC is experiencing a green day, and naturally, Riot Blockchain (RIOT) is no exception. Despite fading a lot of its daily gains, the crypto mining outfit is still up more than 20%, outperforming most cryptocurrencies. Understanding what would cause appetite for Riot Blockchain to surge higher is even more straightforward. They are mostly a cryptocurrency mining outfit but recently announced plans to launch an exchange. Ultimately, this means that upside and revenue for the Nasdaq-listed Riot are based not only around price but also trading appetite in general.

“5-star Swiss Hotel to Accept Bitcoin Payments” Switzerland has been the hub of crypto debates and regulations, and it is proving its status as the world’s largest crypto supporter. Recently, one of its five-star hotels the Dolder Grand said that it would start accepting cryptocurrency as a mode of payment. On Tuesday, Inacta AG,  which is the tech partner of the hotel, declared that it would roll out the option for Bitcoin payment in the hotel. The director of the hotel said that it has been proactive in accepting cryptocurrency as a mode of payment to make it easier for the customers to pay. It is also being used to pay for the other services in the hotel.

“Liquid’s Valuation Crosses $1B”Crypto has a new unicorn after exchange Liquid announced today it has raised capital from investors at a valuation of more than $1 billion as it goes after expansion opportunities. The company said the capital will be put to work expanding into new markets and offering new services, including — potentially — a platform for security tokens. This isn’t the first time that Liquid has visited public markets for capital. It has raised some $20 million from investors that include JAFCO, SBI, B Dash Ventures, Mistletoe and ULS Group.The company also held an ICO for Quoine, its parent company, which raised $100 million in 2017. The sale created Quoine’s Qash token and it meant that the company was the first Japan regulated exchange to run an ICO.

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