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Part 2 of my IEO thread... for Part 1, start here:
4) Syndicate desks are in charge of allocating the security. They talk to investors before a deal prices, and try to gauge preliminary interest. They typically have half or more of the new issue spoken for before they even announce it publicly to reduce the risk of failure.
Clearly, in the case of Ocean Protocol, their first underwriter (CoinList) and second underwriter (Bittrex) didn't have a good pulse on market conditions OR hadn't earned investor trust like Binance has (thus far). This is why it was a disaster blog.oceanprotocol.com/what-happened-…
$LEO on the other hand soft-raised all of the money quietly before even announcing the deal to the public, to ensure that it was a success. And you know they have market makers and investors ready to buy every token if it dips below $1.00 to ensure that this never trades down.
For investors, a new issue is like a call option - never exercise early. So you are incentivized to wait til the last minute to put your allocation in to gather as much information as possible about how the deal is going and who else is investing. Big investors get away w/ this.
BUT, since all new issues (debt, equity, tokens) are about hype - this won't shock you. Underwriters lie all the time! They tell you every deal is oversubscribed whether it is or isn't, in order to entice investors to allocate capital to the deal. They create sense of urgency.
The syndicate desk may offer better terms to early investors, or will guarantee allocations to future deals, or will flat out lie that it is already oversubscribed just to create that sense of urgency. That's why you get 1000 updates throughout the process. They create FOMO.
If a deal is going well, you may request more than you want because you'll get scaled back. If the deal is going poorly, you may put in for less or not at all. But only the syndicate/underwriter really knows the true demand. It's guesswork for everyone else.
This hasn't been really necessary yet with Binance IEOs b/c demand has been off the charts and investors are capped, but it's coming. It may have happened with $LEO (fake high demand created real demand). Syndicate desks are trained liars to instill that sense of urgency.
It's true gamesmanship to get a lot of people to commit to something all at once... easier said than done. But once the demand is truly there, the deal can be priced and will start trading.
5) Once the deal prices & starts trading, the market makers take over. In debt/equity deals, the market makers work for the underwriter, and as such, are focused on appeasing investors by ensuring that the deal doesn't trade down.
Typically, the underwriter builds a short into the offering (they sell more than the issued amount) so they become natural buyers on the break. They will lose money covering their short at higher prices than where it priced, but that comes out of the inv bank's underwriter fees.
With tokens, the market makers are "independent" - so they have to be incentivized other ways. They are given tokens, and are thus incentivized to push prices higher to help themselves. The issuer (& maybe the exchange itself) provides them with capital to cover any losses.
The syndicate desk must warn the market makers about the investors who bought. How many will want to buy more, how many will "flip" it immediately for a quick profit? The success of a new deal will largely be determined by how well the syndicate desk prepares the market makers.
But again, this "defending of the price" only happens for so long. Ultimately, market forces take over, and it won't matter how much effort is put into the pricing and the bidding after the break -- ultimately if there are no "long term buyers", it is doomed to fail. #hotpotato
In debt/equity deals, the underwriter isn't the only market maker - all competitors will trade it as well. This hasn't happened yet with tokens, but Binance can't underwrite AND dominate trading forever -- other exchanges will want these trading fees too.
Not only will this increase liquidity, but it means investors who want to flip won't have to flip it back to the underwriter. Binance knows if you buy through them and sell immediately -- and you won't get an allocation on their better deals if they know you are going to sell.
All in all -- these IEO tactics are not new, just slightly different. But those that are buying these new deals without understanding the mechanics are at risk. Hopefully this helps to shed some light on the capital markets process.
