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March 18, 2019


By: George Calhoun

Crypto exchange Bittrex made news this week when it announced its first initial exchange offering (IEO), which it was to host through its Malta-based affiliate Bittrex International.  Bittrex planned to offer its registered members the opportunity to buy RAID’s XRD token.  RAID is an international gaming data blockchain project, with the goal to create a decentralized game data ecosystem where data can be freely exchanged among users.  The tokens were to begin sale on March 15, 2019.  Bittrex’s move to enter the exchange-hosted token sale space follows the precedent of crypto exchange Binance. Binance’s token sale platform, Launchpad, hosted the high-profile token sale for the Tron-based BitTorrent token (BTT) this January, followed by another public token sale for AI and smart contract project Fetch.AI in February.

But yesterday, Bittrex abruptly cancelled the sale, citing “significant changes in the business status of RAID.”  The cancellation is obviously a blow to Bittrex, but it appears to have developed major concerns about RAID’s plans.[1]  In a tweet, Bittrex hinted at this by stating “Trust and integrity are the most valuable assets of Bittrex International. As a result of significant, last-minute changes with RAID, we have cancelled the IEO offering of the RAID token. We apologize for the inconvenience…” With the IEO on hold, the question remains, are IEOs the future of crypto offerings?

An IEO is similar to an initial coin offering, but relies on having an exchange (or set of exchanges) function as the counter-party rather than having the issuer run the offering itself. Developers create the project’s tokens and send them to an exchange, which will then sell the tokens to individual contributors.  The exchange handles purchaser KYC verification and other prominent functions necessary for the token launch.  Conditions traditionally found in an ICO can be implemented in an IEO, including capping the contribution per individual, having a fixed price per token, and geographic limitations.

Seemingly, the main benefit of an IEO over an ICO is to reduce the possibility of fraud on purchasers.  This is no small matter.  According to a 2018 Coindesk study, 78% of ICOs were identified as a scam.  An exchange’s role in providing a third-party review of an offering should provide significant comfort to investors/purchasers.  Even the appearance of irregularity caused Bittrex to pump the brakes on RAID despite the adverse press.

There are several other key advantages to an IEO:

  • Although IEO’s are not open to the public, the exchange likely has an existing customer base that might more readily support the offering.
  • For the purchaser, they must register with the exchange and derive some comfort that the offering has the backing of the exchange and the transactions are simple to execute.
  • Making it significantly more difficult to scam purchasers because the new token can only purchase the token from the exchange.
  • Functioning as a vote of confidence from the exchange and sponsor, which has to conduct its own due diligence on the developer’s project. The project will have to meet the exchange listing requirements before the offering and the exchange is risking its reputation on the offering.  Like Bittrex in this example, exchanges that hope to survive in the marketplace will proceed cautiously.
  • Easy listing on the exchange following the IEO.

For an issuer, the IEO comes with a big disadvantage: cost.  The exchange likely will insist on both a fee and a cut of the offering proceeds.  In this respect, an ICO likely is significantly less expensive.  Moreover, regulation of IEOs – just as with ICOs – is uncertain and evolving.  An offering conducted through an exchange is still an offering and issuers must be careful to comply with the governing laws and regulations applicable to the offering.  Until major marker countries have clear laws governing ICOs and IEOs, the benefits of this new offering technique seem to ameliorate the major consumer concerns with new offerings.  As such, despite the RAID hiccup, we expect to see an increasing number of them.

[1] Based on subsequent developments, it appears that RAID’s proposed issuing company may not have been registered in Singapore as claimed.

George Calhoun

George Calhoun

George R. Calhoun V is a litigator who knows how to win in a courtroom, at the settlement table, or in arbitration. By putting his clients’ goals and objectives first, he is adept at devising case strategies that achieve his clients’ definition of success. George is chair of Ifrah’s Financial Services practice.

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