Reversing to go forwards: The new style of crypto IPO

Coinbase’s IPO promises to spark a flurry of crypto listings, but smaller crypto firms may choose to forgo the traditional IPO path…

Copper Team

A flood of new crypto company IPOs are on the horizon. 

The most prominent is perhaps the Coinbase IPO, revealed in an exclusive Reuters article in July 2020. The listing could come as soon as late-2020 or early 2021, the article said, citing  three anonymous sources

The San Francisco cryptoexchange has not yet registered with the SEC its intent to go public. 

But the financial news giant divulged that Coinbase bosses have been in talks to hire potential stockbrokers and lawyers, normally the first step on the road to an IPO.   

The move “would represent at landmark victory for cryptocurrency advocates vying for mainstream endorsement”, said reporters Anirban Sen, Joshua Franklin and Anna Irrera. 

Why IPO

Companies usually IPO in order to capitalise on rocketing public interest, accessing deep pools of global retail and institutional liquidity to raise huge war chests of funding. 

As the 20th century’s greatest CEO Jack Welch said, the best way to create a legacy is to build an empire through mergers and acquisitions.  

“If you’ve got the cash, if you’ve communicated with everybody, you’ve taken care of your best… go out and buy or bury the competition,” Welch said.  

While Coinbase has completed Series A to E fundraising rounds totalling $547m — for a valuation north of $8bn — it still has some way to go to bury the competition. 

For this kind of empire-building, you need much more money than private equity is willing to spend. You need millions of private investors buying your public company stock. 

Reversing fortunes

Necessarily, not every crypto company can be Coinbase. That leaves their management with a huge and costly problem to solve. 

An IPO is an incredibly expensive process. Estimates vary, but taking into account ongoing listing fees, lawyers fees, marketing costs, underwriters fees, this can be a yearly bill in the region of $750,000 to $1m and beyond. Then, there is the need for Incredibly detailed and costly regulatory filings, as well as the requirement to be backed by at least a couple of major investment banks. 

And if your shares don’t perform, or your industry hits a regulatory roadblock, your company could find itself being delisted, as has happened with many US cannabis companies. 

For the smaller crypto company it makes more sense to conduct what is called a ‘reverse merger’. 

This procedure is exceedingly common among UK smaller companies seeking to list on the country’s junior AIM market, where it is known as a ‘reverse takeover’. 

A private company finds a business that already has a stock market listing but is not currently trading. This is usually an inactive company, called a shell, or cash shell. 

Our private company then ‘reverses’ itself into that listed firm, thereby taking over its public listing and allowing investors to buy its shares. 

This is a much cheaper and more accessible way to get a stock market listing and begin empire building.

Let’s consider BlockFi, for example. The company told TheBlockCrypto it was hiring a new chief financial officer with the express intent of a 2021 IPO. But despite raising $108m from private equity, let’s say it does not have the depth of capital necessary for a direct NASDAQ IPO. 

It could follow the likes of Voyager CEO Steve Ehrlich, who took his crypto brokerage firm public in February 2019 by ‘reversing’ into UC Resources Ltd, an inactive shell company which nevertheless had a public listing on Canada’s junior TSX Venture Exchange. 

While reverse mergers were once an unusual and esoteric process, as more crypto IPOs come out of the woodwork, they are likely to become increasingly common.  

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