When the software iSCSI initiator is initially created, ESX uses the hostname of the server as a component of the generated IQN.

For example, if the ESX hostname is HOSTNAME1.fictionalcompany.com, the the IQN is initially created similar to iqn.1998-01.com.vmware:HOSTNAME1-0ba2d462.

The IQN can be modified after the initial creation and can be changed to all-lower case.

This article provides information on modifying IQN with recommended characters after it is initially created.

RFC 1034 states that "By convention, domain names can be stored with arbitrary case, but domain name comparisons for all present domain functions are done in a case-insensitive manner, assuming an ASCII character set, and a high
order zero bit."

Therefore, upper case hostnames are allowed, but the comparisons should be based in lowercase.

However, per RFC 3722 - String Profile for iSCSI Names, for those using only ASCII characters (U+0000 to U+007F), these characters are allowed:

For more information, see http://www.ietf.org/rfc/rfc3722.txt.

In addition, any uppercase characters input via a user interface must be mapped to their lower case equivalents. Upper case characters are not in the allowed range.