Global cryptocurrency platform Coinbase is reportedly in talks
with investment banks and law firms about going public, says Louis
Lehot, founder of L2 Counsel. This would lend legitimacy to other
companies building the cryptocurrency ecosystem and potentially
pave the way for future IPOs. It’s considering using a direct
listing, which is gaining in popularity, as private companies
become less dependent on IPOs as a fundraising mechanism.
Rumor has it Coinbase could be the first major player in the
U.S. cryptocurrency industry to go public, and using the mechanism
of a direct listing, instead of a traditional initial public
offering.
Popular American-based cryptocurrency trading platform Coinbase
has rumored plans to pursue a public debut later this year, or
early next year—making the company the latest mega-startup to
approach the public markets. The company has not yet officially
announced its plans to go public, but has reportedly been in talks
with investment banks and has spoken with law firms, which would
mark a significant milestone for the crypto market.
Founded in 2012, Coinbase is one of—if not the—most
well-known cryptocurrency platforms globally, with over 35 million
users who trade virtual coins, including bitcoin, ethereum, and
XRP. The New York Stock Exchange, BBVA, and former Citigroup Inc.
CEO Vikram Pandit are among the San Francisco-based company’s
many investors. Additionally, back in 2017, it was one of the top
beneficiaries of the bitcoin BTC=BTSP boom, when the original
cryptocurrency jumped from $1,000 to almost $20,000.
For the last several years, cryptocurrency exchanges and related
businesses have been in limbo in the U.S., as traditional banks
have shunned the industry, and the Securities and Exchange
Commission has issued regulatory guidance that many digital coins
are securities, following up with enforcement actions when
offerings of securities proceed without complying with securities
regulations.
A new stock market listing for Coinbase would lend legitimacy to
other companies building the cryptocurrency ecosystem, and
potentially pave the way for future IPOs.
Direct Listing Might Be Pursued
According to Reuters, Coinbase may pursue a direct listing for
its shares, instead of a traditional initial public offering. A
direct listing enables a company’s existing shares of common
stock to trade publicly on a national securities exchange without
formally pricing a new block of equity through underwriters
following a traditional book-building process.
In recent years,
direct listings have become much more popular to achieve
efficient pricing, as private companies became less dependent on
IPOs as a fundraising mechanism.
Driving this move to direct listings, some of Silicon
Valley’s most elite entrepreneurs and venture capitalists have
become disenchanted with the underpricing of IPOs, which sometimes
force companies going public to leave tens or hundreds of millions
of dollars on the table. This is because the customers of
underwriters of traditional IPOs expect the IPO price to be
discounted to true valuation to enable a first day bump in the
post-IPO closing price of 20% or more.
Today, Coinbase is archetypal for the sort of company that might
consider a direct listing: it is wealthy, having raised over $500
million during its time as a private company, and has a significant
brand and following. Coinbase’s most recent private financing
of $300 million valued it at $8 billion, according to data
published by Crunchbase.
The direct listing process, contrary to the traditional
book-building IPO, involves existing shareholders of a startup
selling secondary shares to the public directly over a national
securities exchange, instead of the issuer working with Wall Street
underwriters to issue new blocks of shares, and those underwriters
selling them on to their preferred accounts.
Like other recent businesses that have pursued a direct listing,
including Spotify and Slack, Coinbase has a similar profile, with a
high valuation, significant cash reserves and a substantial
customer following and brand.
SEC Blessing Needed
Coinbase co-founder Fred Ehrsam recently said the company is
“spiritually” built to go public through a token
offering, and many of its employees would be disappointed if it
pursues a typical Wall Street IPO.
However, any blockchain offering, even a hybrid one, would
depend on the blessing of the SEC. And, that could perhaps be a
hard bargain given the SEC’s recent enforcement actions against
Telegram and other token issuers.
The term “Coinbase effect” describes the price boost
many cryptocurrencies have had as a result of being listed on
Coinbase, which often occurs because Coinbase is the primary
gateway to crypto for many buyers. So, given Coinbase’s status
in the crypto industry, a successful IPO could create a ripple
effect that boosts the price of Bitcoin, Ethereum, and others.
On the other hand, if Coinbase fails, crypto prices could
plummet dramatically. Additionally, Coinbase may take into account
the state of the broader cryptocurrency market in deciding when to
go public—as cryptocurrencies are known to be volatile, and
prices and trading activities have been in a slump.
Historically, Coinbase’s financial past has been opaque,
with media reporting its 2017 revenue at around $1 billion, boosted
by that year’s crypto-mania. In 2018, how Coinbase performed is
less clear, although media reports described its diminishing
performance alongside that of the currencies that it trades.
The company’s S-1 filing will provide insight into the
company’s historical financial performance, allowing the public
to see how Coinbase fared during various crypto-booms and
busts.
Since being founded in 2012, Coinbase has raised a total of $547
million. In October 2018, its Series E round valued the company at
$8 billion. As new companies like Compound and Kyber continue to
use innovative methods to provide ownership of platforms to users,
a direct listing could be a cost-efficient way for Coinbase to give
users access to company shares.
With public markets at an all-time high and valuations for tech
stocks out-performing the broader indeces, it’s not surprising
that valuable unicorns are getting ready for a run on the public
markets.
Previously published in Bloomberg Law.
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