Cryptocurrency and blockchain-based businesses have long suffered from their perceived connections to the Dark Web and other seedy associations. But there is no denying that crypto is quickly going mainstream. 2020 has already seen the emergence of the U.S.’s first publicly-listed cryptocurrency exchange provider, and there are more crypto businesses all-but-surely coming soon to a stock market near you.
Of course, nothing with cryptocurrencies is typical, and the route crypto businesses are taking to become publicly-traded businesses is no exception. The traditional IPO, and all its associated costs, risks and other hoops to jump through, remains an obstacle that crypto startups are unwilling to traverse. Instead, many crypto businesses looking to go public are choosing an increasingly popular alternative to the traditional IPO: being acquired by a SPAC.
A Blast From the Past
The term “SPAC” is short for special-purpose acquisition corporation. This description refers to the fact that a SPAC is a shell corporation formed expressly for the purpose of acquiring a private business and taking it public.
SPACs typically raise money for the acquisition through a combination of an initial public offering, or IPO, and other financing routes, such as private investment in public equity, or PIPE.
While many people are only just hearing about them now, SPACs have actually been around since the 1990s. In fact, they gained notoriety during the Dotcom Boom, when financial regulations were loose and a lot of investors got burned. But laws have changed since then, and the SPACs from that era are materially different than what companies are doing now. In fact, according to Milos Vulanovic, a researcher who has studied SPACs for years, SPACs as they currently exist only date back to 2003.
Attack of the SPACs
To avoid extra red tape, SPACs do not usually publicly state which company they plan to acquire, although management usually has a target company in mind. It is for this reason that SPACs are often referred to as “blank-check” corporations: Investors have no idea what the SPAC will do with their cash. All they know is that the SPAC will either acquire a company within the time period (typically between 18 and 24 months) stated in the SPAC’s governing documents, or else return them their money.
So, why would anyone invest in a SPAC? For the same reason they give their money over to private equity or venture capital or wealth management firms: trust. Successful SPACs have so far been spearheaded by well-connected firms and individuals, typically hailing from the VC or PE worlds. Similarly, the list of the top SPAC underwriters of 2019 includes big names such as Cantor Fitzgerald, Credit Suisse, and Deutsche Bank. Together, these heavy-hitters have the connections and the status to attract wealthy clients, whose investments serve to get the momentum going on the SPAC and drive public interest in it.
Of course, to get investors to commit to their SPAC the underwriters will need to make a strong financial case for the opportunities present in the industry or geographic area in which they plan to invest, as well as the features of the type of business they plan to acquire.
The Year of the SPACs
The number of SPAC IPOs has increased precipitously over the last two years. The first half of 2020 has already seen more SPAC transactions than all of 2019. According to SPAC Insider, there were 81 SPAC IPOs that raised a combined $33.1 billion as of Aug. 31, 2020. That’s up from just 10 transactions total in 2013. The causes for this are not entirely clear, but one factor that has been proposed is increasing pressure on venture capital firms that have a backlog of investments awaiting exits. For these firms, a SPAC IPO may offer an opportunity to raise some much-needed capital.
SPAC activity is heating up, and the crypto and blockchain spaces are no exception. Ribbit Capital, the crypto and blockchain VC firm, in August filed for a $350 million IPO for its newly-created SPAC. As is typical of SPACs, it has not announced which business it plans to acquire, although analysts expect the target company to be at least crypto or blockchain-adjacent, if not a pure crypto startup. This comes on the tails of SPAC 8i Enterprise Acquisition Corp.’s merger with Diginex, the crypto exchange operator. The closed deal makes Diginex the first exchange provider to go public in the U.S.
There are a few reasons why SPACs have won over so many start-up founders, leading to the rash of SPACs we are witnessing today. For crypto founders and early investors, the primary motivating factor will be that being acquired by a SPAC involves a lot less work and can be substantially faster than going through the IPO process. Because it is the empty shell SPAC that is going public (initially at least), not the operating company, the disclosures are minimal and financial statements as well as prospectuses can be deferred until after the acquisition transaction is closed.
That prospect of avoiding the costs and headaches of an IPO is especially attractive to crypto startups, which may not have the skillsets or experience to take care of all the technical and compliance work that goes into an IPO. Moreover, the regulatory ambiguity that surrounds cryptocurrencies and the associated businesses that have grown up around them have thus-far discouraged crypto startups from going public through a direct IPO. Being acquired by a SPAC means that founders can let experienced banking and finance leaders take care of all the details, while they can monetize their hard work.
For Comprehensive Accounting, Finance and Transaction Support for Your Crypto or Other Blockchain-Based Business, Turn to BPM.
Whether your business is a start-up cryptocurrency or blockchain company preparing for a strategic event, or a mature cryptocurrency or blockchain company expanding into new markets, BPM’s Blockchain and Digital Assets Group can provide the experience and advice you need to thrive and navigate through the rapidly-changing regulatory landscape.
We have deep roots in the blockchain and digital assets ecosystems and are a founding member of the Accounting Blockchain Coalition. A "LendIt Industry Awards" finalist for outstanding achievement in lending and FinTech, BPM understands the complex issues clients face and are proud to be one of the largest West Coast-based accounting and advisory firms serving this space.
Our professionals have extensive knowledge and experience in dealing with tax, accounting and auditing matters, as well as regulatory and compliance issues, including revenue recognition, IT compliance, enterprise risk management and classification of digital assets. Additionally, our offices in India, Hong Kong, and the Cayman Islands allow us to serve entities worldwide, and our integrated approach allows us to simplify complex business processes as a “one-stop” shop.
To learn more, contact Mark Li, Blockchain and Digital Assets Industry Group co-leader, at MLi@bpmcpa.com