IPO or not IPO? PSPC is the question

An initial public offering is the classic way to get a company public, but many crypto companies bypass regulatory scrutiny with a backdoor PSPC merger.

By Connor Sephton

If you want to sell shares of a US company to the public, you traditionally hold an initial public offering, better known as an IPO.

An IPO begins with the long, arduous, and expensive process of filing an S-1 registration statement with the Securities and Exchange Commission (SEC).

Of course, the purpose of an S-1 is to make sure that companies disclose everything the public needs to know to make an informed decision about buying shares in your company, also known as securities.

Which is something cryptocurrency companies have tried to avoid by hosting initial coin offerings, and why the SEC has trampled on ICOs so hard, suing DAO, Block.one, Telegram and currently Ripple, imposing fines of several million dollars and even forcing some companies to return the money collected to investors. Telegram was forced to return $ 1.2 billion of the $ 1.7 billion it raised from investors – giving them a very big haircut – as well as paying a fine of $ 18.5 million. dollars.

And although several crypto companies have recently launched successful IPOs, there are several other avenues to go public. These include direct public offerings, “mini-IPOs” made under SEC Regulation A, or “private placement” sales under Reg. D – which severely limit the amount that can be raised or the number of investors eligible to participate.

Another more aggressive way to reduce SEC scrutiny is the increasingly popular PSPC, which is a backdoor that involves being bought out by a state-owned company created specifically for this purpose.

The old-fashioned way

Until recently, crypto had, by and large, chosen not to participate in IPOs. The main US exchange Coinbase was the largest “pure” crypto company to go public, and it went the direct listing route, avoiding underwriters.

But that changed when the INX trading platform completed the first token IPO in early May, followed shortly after by Swedish crypto broker Safello. And crypto-friendly Robinhood – which entered very hot water during the recent GameStop debacle, followed by a SNAFU Dogecoin – is now on its way to IPO.

There’s a reason so many companies have avoided IPOs, however. Along with the time that an IPO takes – typically 12 to 18 months – the listing company works closely with a major intermediary, the underwriter.

The underwriters are large Wall Street financial institutions that work closely with the listing company on regulatory matters, oversee the extensive marketing tour, help them set the correct share price, then buy the shares and resell them through their networks of large institutional clients – for a big commission.

This means that IPOs are not only very expensive, they make it very difficult for the small investor to get a list of high profile announcements. It’s a fairness issue that Coinbase emphasized when it chose to go straight, which simply meant listing and selling (COIN) shares on the Nasdaq.

SPAC door

A SPAC is what is called a “blank check company” – a company created solely for the purpose of allowing private companies to go public without going through a full IPO.

PSPC raises funds through an SEC-registered IPO that can only be used for one purpose – to acquire a private company – and is typically only listed on a major exchange like the NYSE or the Nasdaq after the acquisition.

It’s an increasingly popular option and one that the crypto industry – and in particular the fintech – has embraced. In January, Bakkt, the cryptocurrency exchange owned by ICE, announced its intention to merge with VPC Impact Acquisition Holdings into a SPAC that will see it listed on the NYSE.

In March, social trading platform eToro, a competitor to Robinhood that manages both crypto and stocks, announced plans to go public through a $ 10.4 billion SPAC merger with FinTech Acquisition. Corp. V.

That same month, Bitfury-owned bitcoin mining company Cipher announced a SPAC merger that valued it at $ 2 billion and is expected to leave the merged companies with nearly $ 600 million in cash.

Advantages and disadvantages

PSPCs have a number of advantages, starting with speed. An IPO can take 12 to 18 months, compared to three to six for a PSPC.

Then there is the money. The amount of an IPO depends on market conditions at the time it occurs, while the price of an IPO is negotiated in advance.

The cost of marketing is much less than that of an extended IPO roadshow, and because SPACs are usually sponsored by people with experience in finance and industry, companies can get advice from experts.

On the other hand, SPAC sponsors typically retain a 20% stake in SPAC after the merger, thereby diluting the holdings of existing shareholders. In addition, PSPC investors can redeem their shares immediately, in addition to the funds raised.

Beyond that, there are still plenty of SEC documents to file and less time to file, as well as less due diligence that comes with the rigors of an IPO. And, the underwriter of an IPO verifies that all regulatory requirements are met, a review that SPACs do not benefit from.

Then there is the credibility. Going down the IPO path does this in a way that PSPCs don’t.

Private placements and mini-IPOs

Regulations A and D are popular for cryptocurrency companies that want to go public but lack the size and resources for a full IPO.

The Reg. D is pretty straightforward: known as a private placement, it falls under IPO regulation, but buyers all have to be “accredited” investors – read “wealthy” or “expert” – and the barriers to disclosure are considerably. weaker. But, investors generally cannot sell their shares for a year.

Telegram tried to use a variant of this route with its TON blockchain, pre-selling tokens to a group of sophisticated investors under Reg. D, which would resell them to the public after the blockchain went live – a process called a Simple Agreement for Future Tokens (SAFT). The SEC, however, simply called it a somewhat delayed securities offering, sued, and asked a court to delay the sale of TON tokens during the litigation. This forced Telegram to back down.

Reg. A, also known as the mini-IPO, is significantly more egalitarian. One company that just made it work really well is Exodus, a cryptocurrency wallet maker that recently raised $ 75 million – the maximum allowed under Reg. A +, which is open to any buyer. And the shares can be sold the next day.

And while the mini-IPO might be considered cheaper, it’s not easy, Exodus CEO JP Richardson said in a recent CoinTelegraph YouTube AMA.

“It’s very similar to doing an IPO and going through the whole process,” Richardson said. “We found one of the largest law firms to help us in this area – Wilson Sonsini, the same firm that did something similar with Blockstack. We began this process in the summer of 2020. We submitted a 200-page offering document confidentially to the SEC in September.

Which was the right time, because it was right after MicroStrategy started pouring hundreds of millions of dollars into Bitcoin and PayPal got into cryptocurrency, triggering a long bull market, Richardson added. Bringing together the entire company, Exodus began selling shares on April 8. But no subscriber or stock exchange was involved.

Instead, Exodus sold its shares through its own portfolio, in what was “a proof of concept to show the world that it is possible,” said Richardson, adding that Exodus planned to use its experience to create a mini-IPO package for crypto companies. .

“We integrate all of the components of the offering itself, with the issue of the stock, with the actual secondary trade,” he said. “Then we’ll go to other companies and say, come in. You can do a stock exchange offer right inside the Exodus platform. And the cool thing is you can buy legal stocks. at night you can buy them on a Saturday or Sunday just like the internet. The internet always sleeps, our stock never sleeps. And that’s the way it should be.