, 22 tweets, 6 min read Read on Twitter
Long thread on #IEOs. Every crypto investor is chasing IEOs ($CELR, $MATIC, $BTT, $FET and soon Harmony). I worked on capital markets desks and syndicate desks at Lehman & Merrill for 2 decades. I'd like to clear up a lot of misconceptions that I've been hearing from others.
This is not advice nor even an opinion on any of the specific IEO investments. It is simply an explanation of the capital raising and syndication process based on my past experience.
Preface: Many argue (correctly) that IEOs are illegal (in the US) since the tokens are clearly securities, & unregulated exchanges are acting as broker/dealers. Thus, U.S. investors can't participate. This article does a nice job explaining B/D rules: linkedin.com/pulse/looming-…
Further, we all know regulation is coming, and for good reason. @arca 's own @PhilipLiu explains this further: ar.ca/blog/reading-t….
BUT, let's assume there are no legal issues. I want to explain HOW these tokens are priced & distributed. Traditional equity / debt offerings have the following players:

1) Issuers
2) Investment bank (Underwriter)
3) Cap Mkts desk
4) Syndicate desk
5) Market Makers
6) Investors
1) The issuing company needs to raise capital. Thus, they will choose an underwriter who gets them the most money (best price). This is not the best price for investors. The issuers' goal is to raise as much as possible, at the cheapest cost to themselves.
In bonds, that means largest amount sold at the lowest coupon with the least restrictions. In equities/tokens, it means highest price/share (price/token). The issuer only cares about investors if they need to raise money again in the future (i.e. don't kill the golden goose).
With token sales, you can argue that issuing companies/projects have more of an incentive to appease investors, since buyers will ideally be users and evangelists of the platform -- but let's not kid ourselves, they still want to raise money at the best price first.
However, unique to tokens vs equity/bonds, the issuer usually owns the majority of non-sold tokens, as do the Exchange and Market makers. So as an investor, you are at least aligned with those that control your fate. Whereas with debt/equity, that's not always the case.
2) The inv bank has to win the business first. So they pitch issuing companies and make statements regarding the price they think investors will pay-- this may not actually come true (it's "best efforts" typically). But they steer the issuing companies to a desired outcome.
The level of due diligence these underwriters perform is typically not to protect investors. It's to protect themselves. They get paid only if the security is sold - so they are incentivized to "pass due diligence". They turn down business only if they find a GLARING red flag.
In IEOs, the Exchanges are acting as investment banks. Sure, their due diligence is probably better than the average retail investor, but again, it's a CYA policy, not a statement of merit regarding the issuer or the investment. Do your own research.
3) Once the investment bank wins the business, the capital markets desk takes over. It's their job to figure out the "clearing price" and the best structure of the investment that investors want. This usually involves relative value, competitor analysis, and market conditions.
If it's a "hot deal" (like $FB IPO), the cap mkts team may "buy the offering" -- meaning they buy the whole deal at a price below where they think they can re-sell it. In a bidding war, the investors usually get a worse price b/c the investment bank had to pay up to win the deal.
Again, the Exchanges do this themselves, but w/out a lot "comps" to compare tokens too, and w/out a lot of competition for business. The price they choose to offer the IEO at is somewhat arbitrary, but at least they aren't bidding up the price ahead of offering to investors.
Recall, the issuing company just wants highest price -- but the capital markets desk (or Exchange) needs to also appease investors. Unlike the issuer who may never issue again, the Exchange/cap mkts desk will ALWAYS issue again. So now you have a tug-o-war.
The Issuing company wants highest price, but the underwriter wants a lower price to ensure the security trades higher -- the happier investors are, the more likely they will buy future deals. This is why most IPOs, bond deals and now IEOs trade up in the first few days/weeks.
BUT they don't care what happens 3 months later. Underwriters measure success based on what happens immediately AFTER the deal prices, not in the future. After a certain amount of time, the price of the security is "out of their control", and absolve themselves of responsibility.
Most cap markets desks have pitchbooks that show how their deals perform 1-day, 7-days, 30-days after pricing. They don't care after that -- their job ends after the initial burst. Their incentives differ from the investors who probably have longer holding periods.
@cz_binance is doing the same thing now -- showing performance of their deals (with an assist from @lawmaster). . This appeases issuers (who have confidence it will succeed) and investors (who start to believe no deal will ever fail).
The good news for investors: w/out competition, Binance holds all of the power. Issuing companies are at the mercy of the Exchanges' advice. But this will change when competition increases. Plus, people are greedy. Someone will kill the goose (read --> ar.ca/blog/crypto-ma…)
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