Cryptocurrencies in public capital markets: opportunities and challenges

On Oct. 20, Mark Wood, co-head of Katten’s National Capital Markets practice, along with representatives from investment bank HC Wainwright & Co., LLC and leading publicly traded Bitcoin miner Bitfarms Ltd., discussed the state of cryptocurrencies and raising capital through focused crypto market participants as part of Katten’s 2022 Annual “Crypto with Katten” Symposium (you can view the symposium agenda here). Below are the highlights of the presentation.

Cryptocurrencies in US public capital markets

In recent years, a wide variety of companies in the cryptocurrency industry have gone public, listing their common stock for trading on a U.S. stock exchange, including cryptocurrency mining companies, e-commerce and payment platforms crypto, cryptocurrency exchanges and other financial services companies that focus on the evolution of the crypto ecosystem. Significantly, many overseas crypto companies have also chosen to tap into US capital markets for equity financing or have chosen to list their shares on US stock exchanges, including many of the largest cryptocurrency miners by market capitalization.I

From record levels to difficult markets

Publicly traded cryptocurrency companies experienced record growth through the end of 2021, with the market capitalization of publicly traded cryptocurrency miners alone exceeding $16.5 billion by the end of the year. Indeed, during 2021, the shares of many cryptocurrency-oriented public companies have appreciated at a faster rate than even the price of Bitcoin itself during the same time period. However, “crypto” stock prices fell along with the broader market in 2022, with the three largest publicly traded Bitcoin mining companies losing more than $4.5 billion in market capitalization, driven by the price crash of cryptocurrencies in general as well as rising electricity costs and general economic and inflationary pressures. Since the beginning of the year, the price of Bitcoin has dropped by around 65%, with many of the major Bitcoin mining companies experiencing a 74-90% percentage drop in market capitalization over the same time period.

Price correlation with stocks

Prior to the COVID-19 pandemic, industry advocates cited the alleged lack of correlation between the price of cryptocurrencies and traditional financial assets such as stocks and bonds as a major industry differentiator, arguing that cryptocurrencies could serve as a strategic hedge and diversification tool for investors. However, a recent study conducted by the International Monetary Fund has confirmed that, at least in the last two years, a clear statistical correlation has developed between the price of stocks and cryptocurrencies (and therefore crypto-focused stocks). Indeed, the study finds that the price of cryptocurrencies may be even more closely correlated to stock market prices than other traditional financial assets, such as bonds or precious metals.

Capital raising options for public crypto companies

Despite a challenging economic environment, many publicly traded cryptocurrency companies continue to pursue capital-raising opportunities, including through (1) traditional underwritten public offerings (and in some cases, confidentially marketed public offerings), (2) negotiated sales privately of common stock (referred to as private public equity investments, or “PIPE” financing), (3) registered “direct” offerings, which are marketed directly to a select group of investors, (4) “at-the- -market” (ATM) and (5) the establishment of “equity credit lines”, among other alternative financing structures.

Recent SEC Statements and Comments

While Securities and Exchange Commission (SEC) Chairman Gary Gensler continues to publicly state that the vast majority of cryptocurrencies themselves are securities and therefore fall under SEC jurisdiction, the SEC has also continued its close scrutiny of publicly traded cryptocurrency companies. , noting that increased regulation and oversight of the space remains a strategic priority. For example, the panel discussed staff focus on the accounting treatment of cryptocurrencies held by custodians of publicly traded cryptocurrencies, including the release of staff guidance suggesting that cryptocurrencies should be accounted for as a liability on companies’ balance sheets , resulting in a major cryptocurrency exchange to start including additional responsive risk factors in its periodic reports. He also discussed an enforcement action filed against an international semiconductor chip maker, who said the company provided insufficient information about the importance of cryptocurrency mining-related activities to the revenue growth of its semiconductor chip business. specialized graphics processing unit that produces chips used in Bitcoin and other cryptocurrency mining rigs. Additionally, the panel noted that the SEC had nearly doubled the size of its Division of Enforcement’s “Crypto Assets and Cyber ​​Unit” in May 2022.

Most recently, the SEC’s Division of Corporation Finance released guidance and sample commentary letter, available here, advising companies to ensure they are adequately disclosing any material adverse exposures they may suffer as a result of recent cryptocurrency-related bankruptcies or adjacent assets and/or financial difficulties between cryptocurrencies participating in the asset market. Specifically, the sample comment letter instructs companies to disclose, to the material extent, (1) how recent bankruptcies have affected their business, (2) whether any cryptocurrencies owned, issued and/or held by the companies serve as collateral for loans or other financial assets of which they or any of their affiliates are a party; and (3) any risks faced by the companies related to regulatory developments in the crypto space, among other disclosures. The guidance notes that the sample comments are not intended to serve as an exhaustive list of cryptocurrency-related disclosures, and companies should consider how they might have been affected individually.

Add a Comment

Your email address will not be published. Required fields are marked *