An initial public offering is an excellent way to take a company public, but many crypto companies bypass regulatory scrutiny with backdoor SPAC mergers.
by Connor Septon
If you want to sell stock in a US company to the public, traditionally you hold an initial public offering, known as an IPO.
An IPO begins with the long, arduous and costly process of filing S-1 registration details with the Securities and Exchange Commission (SEC).
Of course, the purpose of the S-1 is to ensure that companies are disclosing everything the public needs to know to make an informed decision about purchasing shares in your company, otherwise known as securities.
Cryptocurrency Companies Trying to Avoid Placing Initial Coin Offerings, and Why the SEC? stumped so hard On ICOs, suing the likes of DAOhandjob block.ahandjob Wire, and current wave, imposing fines of several million dollars and even forcing some companies to return the money raised to investors. Telegram was forced return $1.2 billion He had to pay a huge haircut as well as a fine of $18.5 million – out of the $1.7 billion he raised from investors.
And while many crypto companies have recently launched successful IPOs, there are many other routes to go public. Among them are direct public offerings, “mini-IPOs” made under Regulation A of the SEC, or “private placement” sales under Reg. D – which severely limits the amount that can be raised or the number of investors eligible to participate.
A more aggressive way to undermine SEC scrutiny is the increasingly popular SPAC, a backdoor that involves being acquired by a public company created specifically for that purpose.
old fashioned way
Until recently, crypto opted out of the IPO altogether. Top US Exchange Coinbase Was The Largest “Pure” Crypto Company go public, and it took the direct listing route, avoiding underwriters.
But that changed when the trading platform INX completed First Token IPO in early May, soon followed By Swedish crypto broker Cephalo. And the crypto-friendly Robinhood – which just got into hot water recently gamestop debacle, then a Dogecoin SNAFU – is now Going the IPO Route.
However, there is a reason many firms have refrained from IPOs. As well as the time it takes for an IPO — typically 12 to 18 months — the listing company works closely with a major middleman, the underwriter.
Underwriters are large Wall Street financial institutions that work closely with the listing company on regulatory issues, oversee the comprehensive marketing roadshow, help them determine the correct stock price, and then purchase the shares and sell them to large institutional clients. Let’s resell them through your network – huge commissions, for one.
This means that not only does an IPO cost a lot, but it also makes it very difficult for the small investor to get a piece of the high-profile listing. It is the fairness issue that Coinbase explained when it chose to go direct, which meant listing and selling shares (COIN) on the Nasdaq.
A SPAC—called a “blank check company”—is formed for the purpose of allowing private companies to go public without a full IPO.
SPAC raises funds in an SEC-registered IPO that can only be used for one purpose — to acquire a private company — and is usually listed only on a major exchange such as the NYSE or Nasdaq after the acquisition.
It is an increasingly popular option, and one that has been embraced by the crypto – and fintech in particular – industry. In January, ICE-owned cryptocurrency exchange Bakkt announces merger plans In SPAC with VPC Impact Acquisition Holdings which will see it listed on the NYSE.
In March, social trading platforms eToro, a Robinhood competitor that handles both crypto and stocks, has acquired the creatively named fintech Acquisition Corp.
The same month the bitcoin mining firm owned by Bitfury Cipher announces SPAC merger Which was valued at $2 billion and the merged firms are expected to have approximately $600 million in cash.
Pros and cons
There are several advantages to SPAC, starting with speed. An IPO may take 12 to 18 months, while a SPAC’s three to six months.
Then there’s money. How much an IPO raises depends on the market conditions when it occurs whereas the price of a SPAC is negotiated ahead of time.
The cost of marketing is much lower than the extended roadshow of IPOs, and since SPACs are typically sponsored by people with experience in finance and industry, companies can obtain expert advice.
On the other hand, SPAC sponsors usually hold a 20% stake in SPAC after the merger, reducing the stake of existing shareholders. And, SPAC investors can redeem their shares immediately, which comes on top of the money raised.
Plus, there’s still a lot of SEC paperwork to file and less time to do, plus less due diligence that comes with the rigors of an IPO. And, while an IPO underwriter checks that all regulatory requirements have been met, a review does not benefit from a SPAC.
Then there’s credibility. Going the IPO route doesn’t do the SPAC.
Private Placement and Mini-IPO
Regulations A and D are popular for cryptocurrency companies that want to go public but do not have the size and resources for a full IPO.
The SEC’s Reg. D is quite simple: Known as a private placement, it is covered under the IPO rules, but the buyer is all “Recognized“Investors” – read “rich” or “experts” – and the disclosure barriers are fairly low. But, investors usually can’t sell their shares for a year.
Telegram tried to use a variation of this route with its TON blockchain, a pre-sale of tokens to a group of sophisticated investors under Reg. D, which will resell them to the public once the blockchain goes live – a process called a simple settlement for future tokens (sa ft) however, the SEC sued, calling it just some of the delayed securities offerings, and got a court to delay the TON token sale during the litigation. This forced Telegram to back down.
reggae. A, also known as a mini-IPO, is largely more egalitarian. One company that just made it work very well is Exodus, a cryptocurrency wallet maker that recently raised $75 million. maximum allowed A+ under Reg, which is open to any buyer. And the shares can be sold the next day.
And while mini-IPOs may be considered less daunting, it’s not easy, Exodus CEO JP Richardson said in a recent Cointelegraph YouTube AMA.
“It’s really like doing an IPO and going through the whole process,” Richardson said. “We got one of the biggest law firms to help us with this – Wilson Soncini, the same firm that did something similar. blockstack. We started this process in the summer of 2020. We secretly submitted a 200-page offer document to the SEC in September.
Richardson said this was a good time, as Microstrategy started pouring millions of dollars into Bitcoin and PayPal moved into the cryptocurrency, triggering a protracted bull run. Exodus began selling the stock on April 8, rallying the entire company. But there was no underwriter or stock exchange involved.
Instead, Exodus sold its stock through its own wallet, which was “a proof of concept to show the world that this is possible,” said Richardson, adding that Exodus launched a mini-IPO package for crypto firms. Have planned to use your experience to create. .
“We build in all the components, from the actual offering to the stock issuance to the actual secondary trading,” he said, “then we’ll go to the other companies and say, Come in. You can take the stock public.” Offered right inside the Exodus platform. And the good thing is that you can buy fiat stock at night, you can buy it on Saturday or Sunday – just like the internet. The internet never sleeps, our stock never sleeps. And so it should be.”
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