24 Sep
The workings of an Initial Exchange Offering
With the innovation of an Initial Exchange Offerings (IEOs), small businesses have started discovering new trends in fundraising strategies. It has allowed SMEs to raise their fundings without depending on institutional investors or banks. This also adds to the strategic arsenal of fund planning for new or growing businesses.
Many business owners and interested investors are still struggling with the basics of how cryptocurrency works, the IEO phenomenon and how to tackle the tax technicalities that come with this process. Therefore our expert cryptocurrency accountants have acquired sufficient experience to help small businesses with an IEO process with accounting, tax and business planning complications.
What is an IEO?
An IEO stands for an Initial Exchange Offering and is an offering that takes place for the new form of blockchain technology called cryptocurrencies conducted directly by an official cryptocurrency exchange. This cryptocurrency exchange administers an IEO which is conducted on behalf of a small business or a startup that is looking to raise funds in return for tokens. The crypto exchange issues and sells tokens that will help small businesses raise the required funding.
Token issuers have to pay a fee when they are conducting the token sale on a crypto exchange platform. Not only the listing fee, but the issuers also have to pay a percentage of sales during the IEO. This enables the crypto startups to sell their tokens on the platform, which lists their coins after an IEO is over such as how stock would trade on a stock exchange. The exchange is incentivised upon helping the issuer’s marketing operations and is receiving the percentage on the tokens sold.
IEO participants have to create an account on the platform of a crypto exchange and do not have to send contributions using smart contracts upfront, just having an account on the exchange with funds in their wallet is sufficient for an investor to participate. The contributors then use the coins they added in their exchange wallets to purchase the tokens of the fundraising company.
What is an ICO?
Initial Coin Offerings (ICO) is just another way to raise money by creating a cryptocurrency linked to a business idea. For instance, the social media giant, Facebook, has introduced their own digital currency ‘Libra’ that was planned to be launched, however, was put on hold due to certain legal complications.
Small businesses offer an ICO by creating a document detailing how the whole process would work. This document is usually called a white paper that explains the idea and how and why it is a great idea to invest in. Based on this document, businesses ask people to send the cryptocurrency and, in exchange, send them the especially linked currency like ‘Libra.’ The expectation is that the idea will be successful and ‘Libra,’ in this case, will be in great demand, therefore raising its value.
ICO’s were however found to be very risky and due to a lot of fraudulent activity that was carried out by individuals through the ICO process, a lot of questions were raised on the status quo and the future of bitcoins. Having no regulatory authority behind it and being a threat to major institutions the currency was expected to fail. Moreover, the unpredictable behaviour of bitcoin had made many millionaires and many people bankrupt, resulting in more uncertainty towards its security and stability.
Exchanges embracing Initial Exchange Offerings
Binance was the first cryptocurrency exchange to embrace IEOs by launching its IEO platform called the Binance Launchpad. Following Binance, an increasing number of cryptocurrency exchanges announced launching their own Initial Exchange Offering platforms.
The acceptance of an IEO can be seen from how massive the success of BitTorrent was, which raised millions in just a few minutes through this process. The second IEO, Fetch.Al established a record of only 22 seconds, hitting a hard cap of $6 million.
How IEO differs from ICO, STO, and ITO?
ICO was quite a popular choice among small businesses in need of fundraising for their blockchain projects. However, the extreme misuse of ICO and frauds had discouraged businesses from investing in it. This misuse is also the reason that Initial Token Offering (ITO), Security Token Offering (STO), and IEO came into existence as alternatives. But what makes an IEO’s conduct different from the others options.
ITO is the same as an ICO; the only difference is that not every tokenized blockchain project launches a new coin. ITO is the preferred term for all the projects using Ethereum blockchain to create a tool allowing functions like revenue share or burning tokens. However, ICO is more commonly used than ITO, and now we rarely see the term ITO being used in the industry.
The main difference between ICOs and IEOs is the exclusivity of access, as anybody can participate in the public issue of an ICO. However, only the members of the exchange can participate in an IEO, even though it is not hard to apply for the membership. An IEO is more safe to invest in than an ICO and is more secure as it is administered by the exchange. The secured membership of the exchange makes an IEO more trustworthy than an ICO.
STO (Security Token Offering) is a complex way to raise capital but differs from an ICO in such a way that in an STO a tokenized financial instrument such as equity, debt etc. is issued in the form of a cryptographic token. However, a STO is more appropriate for potential investors with large budgets and long term investments. In contrast, an IEO has a high cost but is more compatible with the needs of small businesses. All in all, investing in cryptocurrency and coinmaking is a booming startup trend for 2020 and the coming years.
Pros of IEOs
Reduced risks of Frauds
IEO is far more secure than an ICO, as the exchanges monitor every participant and conduct KYC/AML checks on members not to jeopardise the reputation of the exchange. The exchange screens every project on the platform to ensure the authenticity of the project and security of the investors.
High Trust Value
IEOs have high trust value as a third party, the crypto exchange platform conducts and regulates them.
Simplified process
IEO is a straightforward process with set processes and third party regulations that makes it easy to follow for startups. Startups will require a low marketing budget as the exchanges will help with their marketing strategies. The startups will not have to work extensively on their own to promote their campaigns like in an ICO.
Cons of IEO’s
High-Cost value of IEO lists
With good things, there are always some drawbacks that may work as a discouragement for startups. The main disadvantage is the high-cost value of the Initial Exchange Offering lists, which may turn out to be quite expensive for startups. Therefore, it is advisable to consult a crypto exchange accounting specialist to take a listing fee and percentage of tokens sold into consideration while budgeting for an IEO launch.
Uncompromising
An IEO is a strict process as exchanges are putting their reputations on the line; they make sure to look into details before approving any project. These exchanges evaluate the whitepaper of the product, screen the members and ensure the attainability of the project. They may back off from any project that fails to provide a secure and safe business opportunity. They do this for their members, even if it means more strictness towards the coin or token issuer and applicants of memberships.
Less Control
Another disadvantage is the lack of control for startups compared to what they can be getting with an ICO or an STO. The exchanges have all the control over the project details that may or may not work for some businesses.
Video: Initial Exchange Offering (IEO)
Watch the video to understand what is an IEO? and what is the process flow of IEO?
How to launch an IEO
To launch an IEO, you must have a concise and precise knowledge of the basic requirements for a successful launch.
Step 1 Requirements
- The process is almost identical to an ICO with few mandatory requirements as follows:
- An ideal and comprehensive Business Model
- Innovative and advanced technologies
- A minimal viable product (MVP)
- A Token
- Descriptive White Paper
- A strong team to back up the project
- Decent Hard cap
- Buzz of initial investors
- A platform like a website to promote and market your product.
Step 2 Selection of Crypto exchange with IEO platform
It is better to explore all the existing options to identify the most compatible crypto exchange for your IEO. It is probable that you may not like the most famous of the exchanges for your idea. This can be due to security concerns and the fee structure.
Step 3 Exchange membership registration and approval
The last step to launch an IEO is to register with a reputable crypto exchange, you can do this using an IEO platform like Binance. The process will be completed through the following steps for secure membership.
- Submit the registration form along with all the required data regarding you and the project you want to launch
- The exchange team will review your application. They will screen the project details to look for any missing information and attainability.
- You will have to pay the listing fee to secure your membership if your application for an IEO exchange registration gets approval. This fee can be a one-time payment or an annual membership.
Can an IEO be an alternative to an ICO for the long term?
An IEO is a trustworthy cryptocurrency project. The increasing interest from investors and exchanges make it one of the trending methods of fundraising for blockchain-based businesses. The simplification and the security of the whole process, has made IEOs a viable option. There is no doubt that it is here for the long term. However, there is no guarantee that another innovation that is better than this will replace it. For now, it has the potential to be the standard model of fundraising and an alternative to ICO.
Tax Issues when dealing with Crypto Assets
Buying and selling crypto assets can create specific tax implications. With rapid changes in the crypto-asset industry, the rules surrounding the valuing and taxing of these assets are also continually changing. The terminology within this industry can get complex; it is, therefore, advisable to find a suitable personal tax accountant who has expertise working within the industry to avoid any confusion. In order to understand the tax issues of the blockchain system, it is crucial to understand the definition of crypto assets or cryptocurrency.
The taxation of a crypto asset is dependent on its use. The tax treatment will also depend on the type of cryptocurrency, Exchange tokens, Utility tokens, or Security tokens. The complication around the taxation of this can get even more complicated with constant changes; an expert tax accountant who has experience working with such matters can simplify the whole process.
Generally, individuals who hold crypto-assets do so for capital appreciation; if so, they will be liable to capital gains tax on any gains they make on the sale of the asset. If an individual receives the crypto assets from their employer, they will have to pay Income tax and National Insurance on the crypto assets which they receive.
Clear House Accountants are specialist Accountants in London who have experience in working with companies and individuals that handle cryptocurrencies. We also understand the tax implications that arise on the gains of cryptocurrency and other related matters.
Author Bio
Jibran Qureshi FCCA is the Managing Director of Clear House Accountants, and has over 10 years of experience in practice and across multiple industries. Jibran’s educational background includes a Master’s in Financial Strategy from Oxford University and an Executive MBA from Hult International Business School. His experience in Financial Strategy, Tax Planning, Operational Consultancy and Performance Reporting guide his cognizant approach to leading Clear House and its clients to the future. It was this dexterity that led him to be Enterprise Nation’s Top 50 Advisors.
Jibran is fueled by his passion for helping businesses. He unequivocally believes that as business advisors and accountants for our clients, it is our responsibility to work with them as business partners. As specialists, it is our duty to help our clients navigate through the complexities of constant change and the implications that come with it.
Over the past decade, innovative disruptions have changed the way businesses work, everything from cloud software, innovative business models, to AI and machine learning, have impacted how businesses operate, grow, and expand.
Jibran recognized the need to manage these disruptions sustainably, early on and shaped Clear House Accountants to not just be compliance specialists, but advisors who help build complex ecosystems around cloud accounting software, provide advice on funding support, help manage innovative tax schemes, set up and implement complex strategic plans, and much more. So, his clients can thrive, not just survive.
Jibran developed his prime role as the Managing Director to build Clear House’s capabilities so it can add value for their clients. He is of firm belief that this can be done through consistent high-level training, building the right tools, and creating roadmaps to help businesses cope with prospective disruptions. He envisages that every client that comes on board, is provided maximum value through onboarding, ongoing services and the right mix of tools to help them become the best in the world.
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