Nascent cryptocurrency companies itching to make their public debuts are forgoing traditional IPOs in favor of more lightly regulated alternatives.
By Troy Hooper and Rachel Stone
Cryptocurrency companies eyeing the stock exchanges are likely to eschew traditional initial public offerings and take alternative paths instead.
Since the virtual coins are designed to replicate and replace traditional financial services using digitized ledgers known as blockchains, it is only natural the businesses that are built around them would seek alternative ways to go public and cash out their investors.
Coinbase’s market debut in April is the biggest public listing yet in the nascent space, setting the stage for other well-capitalized, profitable crypto businesses to consider direct listings, sources told Mergermarket. Other players like Apex Clearing, Bakkt, Cipher Mining and eToro are going public through mergers with special purpose acquisition companies (SPACs). In 2019, Voyager went public through a reverse merger with a shell company.
“The direct listing model has appeal to crypto companies because it’s a democratized model,” said Lisa Ellis, an analyst at MoffettNathanson. “It fits with the ethos of cryptocurrencies of democratization of finance. In a direct listing, there is no roadshow or allocations by investment banks to a privileged set of investors.” She said every retail investor has access to the same information, documents and trading on the same day “but it’s only practical if you don’t need money” since direct listings are not a means to raise additional capital.
Direct listings are better suited for businesses with brand recognition, said Ralph De Martino, a partner at the law firm Schiff Hardin. Many crypto companies were formed in the last decade and haven’t yet developed substantial brand recognition. Going public through a SPAC, he said, is a more popular IPO alternative for entrepreneurs looking to capitalize on an “exuberant market.”
One of De Martino’s clients, Good Works Acquisition, is merging with Cipher Mining, a newly formed subsidiary of Amsterdam-based blockchain firm Bitfury.
“Coming to market through a SPAC enabled us to get to the market quickly and capitalize on the growing interest in crypto,” Cipher CEO Tyler Page told Mergermarket.
Startups also stand to benefit from the connections and expertise of SPAC executives and board members, especially as many crypto executives come from outside the traditional financial services landscape. “Given that crypto is still so new and early in its technology, there is value in having the SPAC owners on board to help shepherd you through that process,” said Ellis.
Lefteris Acquisition’s board of directors, for example, includes Asiff Hirji, the former chief operating officer of Coinbase. The blank-check company is looking to merge with a fintech company.
San Francisco-based Kraken may be the next crypto exchange to file for a direct listing, according to industry sources. The company, which launched in 2013 and is a rival to Coinbase, has launched a mobile app that allows users across the U.S. to buy and sell more than 50 crypto tokens.
Other possible candidates to go public through a direct listing or SPAC include crypto lender Blockfi, crypto exchange Gemini and blockchain settlement platform Paxos, all based in New York. San Francisco-based payment protocol provider Ripple Labs could also go public, they said, but first it will need to overcome an action by the SEC, which alleged the company and two executives raised over $1.3 billion through an unregistered, ongoing digital asset securities offering. Boston-based Circle may make it as a standalone listed payment company too, they said.
Coinbase’s listing is widely viewed as validation of digital currencies, just as they are seeing broader adoption with fintech giants PayPal and Square launching crypto services. The valuation of publicly traded crypto businesses is highly correlated to the price of digital currency mainstays Bitcoin and Ethereum. Goldman Sachs also quietly established a cryptocurrency desk in March that trades Bitcoin derivatives.
But valuing crypto-related businesses can be a challenge. Coinbase’s market capitalization soared above $112 billion with its shares trading as high as $429 on its first day of trading. Weeks later, its share price plummeted to $208, cutting its market cap by more than half.
Coinbase’s strategy is to become a broader infrastructure provider. It recently invested in a product, Coinbase Commerce, geared toward merchants who want to accept digital coins as payment, and it is developing a platform-as-a-service for blockchain. Earlier this year, Coinbase bought Bison Trails, a blockchain infrastructure company that some experts have likened to Amazon Web Services for the crypto community. The all-stock acquisition of Bison Trails was reported to be worth approximately $80 million.
“Thinking about Coinbase as a retail brokerage is little bit like thinking about Amazon as a bookseller at the time of its IPO,” Ellis said.
Crypto businesses prefer to be judged on their own merits, Ellis said, but “for the time being at least, their revenues will ebb and flow” in tandem with cryptocurrencies.
Based in Los Angeles, Troy Hooper ([email protected]) oversees IPO and SPAC content for Mergermarket. Rachel Stone ([email protected]) covers fintech out of Mergermarket’s news bureau in Charlottesville, Virginia.