The reason behind the Hong Kong Stock Exchange's rejection of all mining machine manufacturers' listings is that they don't want to be the first to try something new.

Editor's note: This article is translated from Coindesk by Odaily Planet Daily. In the past six months, three domestic mining giants, Canaan Cloud Intelligence, Ebang International, and Bitmain, have successively applied for IPOs in Hong Kong. This matter has always been the focus of attention of the entire blockchain world. Now, Canaan Cloud Intelligence has passed the six-month application period, Ebang International is about to expire, and Bitmain's application period has also been more than halfway. Whether the domestic mining giants can go public in Hong Kong is still unclear.

The Hong Kong Stock Exchange (HKEX) has indicated it may be reluctant to approve initial public offering (IPO) applications from domestic cryptocurrency mining equipment manufacturers, Coindesk reported.

Following the cryptocurrency market surge in 2017, mining giants Canaan Creative, Ebang and Bitmain submitted listing applications to the Hong Kong Stock Exchange in May, June and September this year, respectively. The most notable of these is Bitmain's application for listing, which is also seen as a watershed for the listing of mining machine manufacturers, as Bitmain is currently the most well-known and powerful crypto startup in the industry.

But according to sources, the bear market in 2018 has exacerbated the ups and downs of the cryptocurrency market, and has also made the Hong Kong Stock Exchange worried about these crypto companies applying for listing. It is now certain that Canaan Creative's IPO application has been rejected, and Ebang International and Bitmain are actively trying to persuade the Hong Kong Stock Exchange, but it is reportedly difficult. The unnamed source added:

“The Hong Kong Stock Exchange is very hesitant to approve these bitcoin mining companies to go public because they believe that the industry is too volatile and risky, and may even disappear completely in a year or two. The Hong Kong Stock Exchange does not want to be the first to try it, nor does it want to be the first stock exchange in the world to approve cryptocurrency mining companies to go public.”

However, according to a spokesperson for the Hong Kong Stock Exchange, they will not make official comments on individual companies or individual listing applications. In addition, Bitmain also refused to comment on the matter due to the pre-IPO silent period, while Canaan Creative and Ebang International did not make any relevant statements.

According to the general IPO process of the Hong Kong Stock Exchange, a company that wants to go public needs to first submit a draft prospectus to them, after which the staff of the Hong Kong Stock Exchange will have multiple conversations and ask questions with the applicant. If the listing application is approved by the Hong Kong Stock Exchange and the Hong Kong Securities and Futures Commission (Hong Kong's local financial regulator, similar to the SFC), the application will enter the next stage - the listing hearing, during which the size of the stock offering and the share price will be determined before being released to the public.

However, if the IPO application does not enter the listing hearing stage six months after submitting the listing application, it means that the listing application will be invalid. If the applicant still hopes to continue to raise funds through listing on the Hong Kong Stock Exchange, it will need to restart the application.

Canaan Creative's IPO application expired in November this year because they failed to enter the listing hearing stage within six months after submitting their IPO application. Ebang International submitted its listing application to the Hong Kong Stock Exchange on June 24, 2018, and now there are only two weeks left in the six-month hearing window. As for Bitmain, as we all know, their six-month hearing window has passed halfway.

The anonymous source added:

“Now, I think all three cryptocurrency mining companies will not be able to attend the listing hearing. They need to obtain approval from both the Hong Kong Stock Exchange and the Hong Kong Securities and Futures Commission. As long as one party does not approve, they will not be able to enter the listing hearing stage.”

The road to IPO for cryptocurrency mining companies is fraught with difficulties

Lawyers familiar with the Hong Kong Stock Exchange's IPO process said the SFC and HKEX's hesitation is understandable.

Ivy Wong, partner at Baker McKenzie, said that in addition to the financial data meeting the basic listing requirements, the Hong Kong Stock Exchange will also focus on the business practicality and sustainability of the applicant companies, as well as the risk protection measures for retail investors. She said:

“As far as I know, the cryptocurrency mining companies applying for listing have met the basic listing requirements of three years of financial data, but the Hong Kong Stock Exchange is full of doubts about the sustainability of their business, which is also one of the main reasons for their reluctance to approve the listing.”

Frank Bi is a partner at Ashurst, an international law firm in Hong Kong, who often works with listed companies. In response to questions about the listing of cryptocurrency mining companies, he said:

“The Hong Kong Stock Exchange is very cautious about cryptocurrency mining companies applying for IPOs in Hong Kong because they are worried about a series of regulatory uncertainties that will follow. Coupled with the recent plunge in Bitcoin prices, people have begun to doubt whether the business model of the crypto industry is sustainable.”

Neither Canaan Creative nor Ebang International released their third quarter financial reports, and the cryptocurrency market started to decline in the third quarter of this year. The aforementioned source said:

"If their revenue and profits fall sharply, they will have to disclose this information publicly, which is what worries the Hong Kong Stock Exchange the most."

However, the source explained that the Hong Kong Stock Exchange seems to be deliberately taking advantage of the current decline in the cryptocurrency market to "find excuses" not to approve the listing applications of these companies, because as things stand, the Hong Kong Stock Exchange seems to have no reason to completely reject cryptocurrency mining companies from launching IPOs. The source continued:

“The Hong Kong Stock Exchange is stalling. If the cryptocurrency market keeps rising, they will probably approve the listings of Canaan, Ebang and Bitmain. The Hong Kong Stock Exchange is very concerned about market performance, but now that the industry is declining, these companies have to prove how the mining industry can be sustainable.”

According to Frank Bi, the two most common reasons for the Hong Kong Stock Exchange to delay IPOs are that the applicant has not met the due diligence and information disclosure requirements of the Hong Kong Stock Exchange, and that the company's true valuation is inconsistent with the valuation that existing investors want to exit. Frank Bi said:

“The Hong Kong Stock Exchange has always been known for carefully checking the business sustainability of IPO applicants.”

"Give up" mining business and go public through a detour?

According to the draft listing application submitted by Bitmain, they are trying to prove to the Hong Kong Stock Exchange that their business model is not just cryptocurrency mining, but they are building a diversified business brand that will include artificial intelligence, telecommunications, and blockchain research and development, etc. For example, Bitmain claims in their prospectus that they are "a strong and only positive player in the artificial intelligence chip industry, and may compete with technology giants such as Nvidia or Google in the future."

In addition, Bitmain stated in its prospectus:

“With our success and expertise in ASIC chip design and strong R&D capabilities, we will expand our business focus to the revolutionary industry field of artificial intelligence and hopefully achieve promising results.”

Bitmain launched the experimental artificial intelligence chip BM1680 in the second quarter of last year. This chip can be used as a tensor computing acceleration processor for deep learning and is suitable for the training and reasoning of artificial neural networks.

But even so, these "reasons" do not seem to have played the role they should have in front of the Hong Kong Stock Exchange.

The anonymous source continued:

“In fact, Bitmain is just a manufacturer that focuses on making bitcoin mining equipment. If the entire mining industry is very successful, these companies will also become strong, otherwise it will bring greater risks.”

Frank Bi also agreed with the source, saying that although Bitmain has issued a statement that it will expand its business model beyond cryptocurrency mining, cryptocurrency mining still accounts for a large part of their revenue. Another factor affecting Bitmain's listing is that they hold a large amount of cryptocurrency, but in the past six months, the value of cryptocurrency has fallen sharply. Frank Bi added:

“Bitmain’s ability to disclose very limited information about its business operations, coupled with the recent sharp drop in cryptocurrency market prices, has led regulators to more closely scrutinize its operations.”

According to information disclosed by Bitmain on June 30, 2018, they have crypto assets worth $886.9 million, including Bitcoin, Bitcoin Cash, Ethereum, Litecoin and Dash. According to Crypto-Economics Explorer data, the prices of all these cryptocurrencies have now fallen by at least 50%, among which Bitcoin Cash has plummeted in price after the recent "hard fork mining war", and Bitmain has played a very important role in its "Bitcoin Cash ABC camp".

Sources said holding so much crypto does not help with going public at all because it just means you’ve added more risk, which now affects not only your revenue but also your balance sheet.

Bitmain is actually not short of money, and going public is just a "symbol of status"?

What is certain is that IPO financing is not what Bitmain values ​​most, but "face" may be very important.

The anonymous source mentioned above revealed:

“All these bitcoin mining companies, including Ebang, Canaan and Bitmain, are actually looking to get regulatory approval and public company status, not to raise funds. In fact, they have quite a lot of funds in their hands because they have made a lot of money in the past year.”

There is no doubt that the crazy rise of the cryptocurrency market in 2017 brought exponential revenue and profit growth to Chinese mining companies. Last year, Bitmain, Canaan Creative and Ebang International made profits of $1.2 billion, $56 million and $60 million respectively. Not only that, the executive salaries of these companies have also risen. According to documents submitted by Bitmain, although the company's two founders, Zhan Ketuan and Wu Jihan, only have an annual salary of $27,000, they received $22.7 million and $20.4 million in year-end dividends respectively.

Ivy Wong, partner at Baker McKenzie, said there are many reasons why companies seek IPOs. Some companies hope to raise funds and realize returns through this method, while others hope to gain a good market image. She said:

“I guess the reasons why these cryptocurrency mining companies are going public may be complicated. They may just want to be the first mover in the market and set a market precedent.”

Ivy Wong admitted that it may be too early to tell whether cryptocurrency mining companies will succeed or fail, as the entire crypto market is still relatively young and people have yet to see how it will develop in the future. She concluded:

“In any case, cryptocurrency mining companies applying for listing may provide investors with more investment options and meet the needs of investors with different risk preferences in the investment market.”