From mining companies to exchanges, the race for cryptocurrency IPOs is heating up

Cryptocurrency-related companies in various countries, including exchanges and mining companies, plan to go public through traditional IPOs, list on the stock exchange market and conduct trading financing. In addition to the traditional IPO model, companies can also go public through backdoor listings and Dutch auctions. However, these shortcuts are not very helpful for cryptocurrency-related companies. There are examples of cryptocurrency listings in Australia and the United Kingdom. In China, cryptocurrency-related companies represented by Bitmain and its competitors are also planning to enter the Hong Kong market, which has a relatively friendly trading environment, to achieve company listings.

Last week, at least two cryptocurrency-related businesses, Silicon Valley-based stock and cryptocurrency trading platform Robinhood and Singapore-based cryptocurrency exchange Huobi, took a step closer to going public through initial public offerings (IPOs).

The “old-school” way of raising money seems particularly attractive amid a market trend toward mass IPOs and a fading ICO market that is now at its lowest point in 16 months. But what exactly is an IPO, and which cryptocurrency-related companies are choosing to go public?

What is an IPO?

The concept of an Initial Public Offering (IPO) is familiar to those who are familiar with the concept of an Initial Coin Offering (ICO), which is a more traditional way for companies to seek investment from a wider audience in the public markets. The main difference between the two is that an ICO issues tokens whose specific use cases depend on the company's performance, while an IPO gives investors stock ownership in a company.

An IPO, or stock market offering, means that a company sells its shares to institutional or retail (individual investors). This process is significantly more strictly regulated than the ICO market: IPOs must be supervised by regulators, such as the US Securities and Exchange Commission (SEC), and one or more investment banks are selected as underwriters. The so-called "underwriters" manage the entire process, negotiate with the SEC, and help their clients list on the stock exchange. In the end, they receive a commission on the funds raised.

Once a company is listed on a stock exchange, such as Nasdaq in New York, it becomes public — meaning its shares can be traded freely on the open market. Crucially, the company must now comply with regulators and release information about its internal operations to keep investors on their toes.

A successful IPO can bring many benefits, such as attracting more investors to inject capital, diversifying the equity base, and increasing the company's overall visibility and reputation. Correspondingly, IPOs also have their disadvantages, including some possible risks, including insufficient funds raised, legal fees and the requirement to disclose sensitive financial information.

Generally speaking, ICOs allow investors to pay with cryptocurrencies, usually ETH, so the entire event has a certain anonymity, while IPO investors can only use fiat currency. However, in August, cannabis culture media organization HighTimes Holding announced that it would accept Bitcoin and ETH in its recent IPO, making it "the first traditional securities offering ever to accept cryptocurrency investment." Although the SEC later claimed that High Times could not support the use of cryptocurrencies to purchase shares, the company's representative Jon Cappetta later confirmed that, in fact, the company could technically accept BTC and ETH as payment options, although they would rely on third-party companies to convert digital currencies into US dollars to meet the SEC's requirements.

Alternatives to IPOs: A shortcut to going public

In addition to the traditional IPO described above, there are other ways for a company to go public - namely, backdoor listings and Dutch auction IPOs.

A reverse merger, or backdoor listing, is a way to go public more easily by bypassing at least some of the bureaucratic scrutiny involved in the IPO process. A reverse merger involves a private company buying enough shares to gain control of another public company (also known as a shell). The private company's shareholders then merge the shell company with theirs and exchange their shares for a majority stake in the public company.

At that point, they have successfully gone public without having to go through the entire process of a traditional IPO as described above. In countries like the United States, companies going public through a reverse merger still need to disclose information about the transaction to the SEC, however, "these companies are not required to register under the Securities Act of 1933 in accordance with the traditional IPO process," according to the regulator's website. In addition, if the reverse merger company hopes to sell its securities on an exchange, the company must still meet the exchange's initial public offering standards to be eligible for listing - but in the end, the whole process is still much cheaper and faster.

In contrast, a Dutch auction IPO is more like an ICO — it represents a method that, unlike a traditional IPO, raises funds directly from the public, thus saving commissions paid to investment banks.

As Investopedia summarizes, in a Dutch auction IPO, potential investors submit the number of shares they wish to bid for and the price they are willing to pay. Once bidding begins, "the allotted shares are sold to bidders in a descending order from highest to lowest until all shares are sold." The IPO is priced based on the last winning bid. Patrick Byrne's Overstock.com is perhaps the largest company to go public via a Dutch auction IPO that has at least some connection to cryptocurrency.

Australia and the UK: First Cryptocurrency IPOs

Although most cryptocurrency companies still rely on ICOs, as Block.one’s June initial coin offering showed, investors are ready to pour unprecedented amounts of money into an unreleased product, and some players have already gone public through IPOs.

Bitcoin Group Limited, an Australia-based bitcoin mining company, has almost locked in a much-anticipated first, with plans to become the world's first cryptocurrency company to be traded on a stock exchange. Back in 2015, the company filed its first prospectus with the Australian Stock Exchange, and after a series of delays caused by the intervention of the Australian Securities and Investments Commission, it raised A$5.9 million during its IPO, significantly below its A$20 million fundraising target. The Australian Stock Exchange subsequently raised concerns about Bitcoin Group's capitalization, and the company chose to withdraw from the stock market.

Since then, the ASX has seen at least two more cryptocurrency-related success stories: Kyckr, a fintech startup that uses blockchain technology for its enterprise identity management platform, listed on the ASX in 2016 after raising A$5.2 million, and Identitii, a blockchain-based software company that helps financial institutions exchange payment information, listed on the ASX after raising A$11 million in an IPO in August 2018. It’s unclear how Identitii will perform, but Kyckr’s shares are currently trading at 12 cents, compared with an initial price of 20 cents.

Another country that has seen cryptocurrency-related IPOs is the United Kingdom. The Financial Times reported that as early as December 2015, Coinsilium, a company that provides consulting services for blockchain projects, was listed on the London ISDX Growth Market, becoming the world's first listed blockchain company. Coinsilium issued a total of 10 million common shares at a price of approximately £0.13 per share, and the company raised a gross profit of £1 million ($1.3 million) from the IPO. Cameron Parry, executive chairman of Coinsilium, commented on the news, calling it "the world's first IPO by a blockchain technology company." At press time, the company's shares were trading at approximately £0.09 per share.

Additionally, in August 2018, mining company Argo Blockchain Ltd. became the first cryptocurrency company to join the London Stock Exchange, raising approximately $32 million for a total value of approximately $61 million. The company offers mining services for four cryptocurrencies to its customers, including BTG, ETH, ETC, and Zcash. It sold a total of 156.25 million ordinary shares, representing 53.2% of the company's issued share capital, at a price of approximately £0.21 per share. At press time, Argo's share price was approximately £0.23 per share.

Hong Kong: The home of China’s largest mining companies

The top player in the IPO race could be Bitmain, a highly successful Chinese mining company that generated about $3.5 billion in profits in 2017—arguably one of the most influential companies in the industry. Specifically, Bitmain has developed high-grade Bitcoin mining hardware and has a strong mining capacity.

In June, media reports began to emerge that Bitmain’s co-CEO Jihan Wu was planning an overseas IPO in a dollar-dominated market, such as Hong Kong, which would allow early investors to cash out.

In late July, a research unit of cryptocurrency exchange BitMEX analyzed leaked data on Bitmain’s potential IPO and said the mining giant had already conducted a round of IPO pre-sales, which allegedly raised a total of about $14 billion. BitMEX speculated that the company could raise no less than $20 billion in the IPO stage.

Still, as Cointelegraph reported, there has been a lot of rumors and uncertainty surrounding Bitmain’s upcoming IPO. For example, while DST Global and Japan’s SoftBank Group were both initially listed as potential investors, both have since denied committing capital. However, if the Bitmain IPO does go ahead, it could have an impact on the entire cryptocurrency industry simply due to the scale of its operations.

But Bitmain may also be surpassed by its peers: Canaan Creative, China's second-largest BTC mining hardware manufacturer, and its competitor Ebang Information Technology have both announced plans to conduct IPOs on the Hong Kong Stock Exchange, which has not yet listed any cryptocurrency-related securities. Interestingly, Canaan Creative and Ebang Information Technology both have an estimated target of $1 billion, which is particularly modest compared to Bitmain's high-profile $20 billion.

It is worth noting that in order to adapt to the increasing number of fintech-based IPOs, the Hong Kong Stock Exchange announced in August that it would set up a new blockchain-based private market. This market is called the HKEx Private Market, and its main purpose is to help smaller startups raise funds through IPO pre-sales before entering the larger market and facing regulatory supervision. Charles Li, CEO of the Hong Kong Stock Exchange, said that this market is expected to be launched by the end of this year:

“We plan to launch a new platform, the HKEX Private Market, in 2018, which will provide a blockchain-based share registration and transfer platform for early-stage companies and their investors to complete IPO pre-sale financing and other activities in an over-the-counter market that is not regulated by the Securities and Futures Ordinance. This private market will serve as a breeding ground for early-stage companies to grow before they are ready to enter the public market.”

Backdoor listing: Easier, but not necessarily the path to success for cryptocurrency companies

On August 29, the Hong Kong Stock Exchange announced that Huobi has acquired a controlling stake in Pantaronics Holdings, an electronics manufacturing company based in Hong Kong.

Huobi, together with blockchain services provider platform Fission Capital, reportedly holds a total stake of 71.67% in Pantronics — with Huobi holding 66.26% and Fission Capital holding 5.41%.

Huobi’s acquisition carries obvious signals of a backdoor listing. However, Sandy Peng, a partner at Fission Capital, told Cointelegraph, “At present, this is just a simple acquisition... As stated in the statement, Huobi plans to use this company to develop new blockchain-related businesses.”

In fact, although the reverse merger model is more economical and convenient, it is rarely effective for cryptocurrency companies: on August 1, when cryptocurrency evangelist Mike Novogratz's company Galaxy Digital, a merchant bank focused on cryptocurrency, debuted on the Venture Exchange of the Toronto Stock Exchange, Canada's largest stock exchange, the company's stock plummeted by 20%.

Lacking the two years of audited financials required for a U.S. public offering, Novogratz acquired Coin Capital, a Canadian cryptocurrency startup, and then merged it with Bradmer Pharmaceuticals, a shell company already listed on the Toronto Stock Exchange.

Before approving the listing, Canadian regulators conducted a strict review of the company and postponed its initial public offering from April to August. During this period, the cryptocurrency market was in a long-term bear market and BTC fell below $6,000.

The US stock exchange advises investors to be particularly cautious when investing in stocks issued by companies that go public through backdoor listings.

From Coinsquare to Coinbase: More IPOs coming

In September, Techcrunch reported that Robinhood, a stock and cryptocurrency trading platform with 5 million customers, was looking for a chief financial officer (CFO) to lead the company on its path to an IPO. The Silicon Valley startup is currently undergoing a series of audits by U.S. stock exchanges and financial industry regulators to ensure its compliance.

According to Bloomberg, Coinsquare, one of Canada’s largest cryptocurrency exchanges, plans to launch an IPO in September with a financing target of $120 million to promote overseas business growth. Interestingly, the media pointed out that Coinsquare plans to sell shares on the Toronto Stock Exchange, “in contrast to some companies that have taken shortcuts to list on Canada’s Toronto Primary Venture Exchange in recent months by using reverse mergers.”

Another interesting point is that Coinsquare CEO Cole Diamond insisted that Coinsquare would not take the approach of a reverse merger, saying:

“We certainly wouldn’t do that. We think there are a lot of bad deals coming into the market right now.”

Coinbase, another US-based cryptocurrency exchange known for its thorough compliance with regulators, also appeared to be considering an IPO since December 2017, but has not yet disclosed any specific details about the listing. Meanwhile, all eyes are on Bitmain and its competitors, which are scrambling to enter the blockchain-friendly Hong Kong market.