Crypto in Public Capital Markets: Opportunities and Challenges

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On October 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 status of cryptocurrencies and capital raising by targeted crypto market participants as part of Katten’s annual “Crypto with Katten” 2022 symposium (you can view the symposium agenda here). Below are highlights of the presentation.

Crypto in US Public Capital Markets

A wide variety of crypto companies have “gone public” in recent years – listing their common stock for trading on a stock exchange in the United States – including cryptocurrency mining companies, e-commerce and crypto payment platforms, cryptocurrency exchanges and other financial services companies focusing on the evolution of the crypto ecosystem. Significantly, many overseas crypto companies have also opted to tap into the United States capital markets for equity financing or have opted to list their shares on United States stock exchanges, including good number of largest crypto miners by market capitalization.1

From record highs to tough markets

Listed crypto companies have seen record growth through the end of 2021, with the market capitalization of listed crypto miners alone exceeding $16.5 billion by the end of the year. Indeed, in 2021, the shares of many crypto-focused listed companies have appreciated at a faster rate than even the price of Bitcoin itself over the same period. However, “crypto” stock prices have fallen alongside the general market in 2022, with the three largest publicly traded Bitcoin mining companies losing over $4.5 billion in market capitalization, boosted by the collapse in crypto prices. -currencies generally in addition to rising electricity costs and general economic and inflationary pressures. Since the beginning of the year, the price of Bitcoin has fallen by around 65%, with many top mining companies having seen a percentage drop in market capitalization of 74-90% over the same period.

Price correlation with stocks

Prior to the COVID-19 pandemic, industry proponents 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 act as a strategic hedging and diversification tool for investors. However, a recent study by the International Monetary Fund has confirmed that, at least over the past two years, a clear statistical correlation between the price of equity securities and cryptocurrencies (and therefore crypto-focused stocks) s is developed. In fact, the study notes that the price of cryptocurrencies may be even more closely correlated to stock 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 crypto companies continue to pursue opportunities to raise capital, including through (1) traditional syndicated public offerings (and in some cases privately marketed public offerings), ( 2) privately negotiated sales of common stock (referred to as private investments in public funds or “PIPE” financings), (3) registered “direct” offers, which are marketed directly to a group limited number of investors, (4) “at-the-market” (ATM) offerings, and (5) the institution of “equity lines of credit”, among other alternative financing structures.

Recent SEC Statements and Comments

While Securities and Exchange Commission (SEC) Chairman Gary Gensler continues to state publicly that the vast majority of cryptocurrencies themselves are securities and therefore fall under the jurisdiction of the SEC, the SEC has also continued its scrutiny of publicly traded crypto companies, noting that increased regulation and oversight of the space remains a strategic priority. For example, the panel discussed staff’s focus on the accounting treatment of crypto assets held by exchange-listed crypto asset custodians, including staff issuing guidance suggesting that crypto assets should be counted as liabilities on corporate balance sheets, which would result in a leading crypto exchange starting to include additional reactive risk factors in its periodic reports. He also discussed an enforcement action brought against an international semiconductor chip maker, which alleged that the company had provided insufficient information regarding the importance of crypto mining activity to growth. revenue from its specialized graphics processing unit chip business which produces chips used in Bitcoin and other cryptocurrency mining rigs. Additionally, the panel noted that the SEC nearly doubled the size of its Division of Enforcement’s “Crypto Assets and Cyber ​​Unit” in May 2022.

More recently, the SEC’s Division of Corporation Finance issued guidance and a sample comment letter, available here, advising companies to ensure that they adequately disclose any material adverse exposure they may incur following recent crypto-related or adjacent bankruptcies and/or financial difficulties among crypto asset market participants. Specifically, the comment letter template asks companies to disclose, to the extent material, (1) the impact of recent bankruptcies on their business, (2) whether any crypto assets owned, issued, and/or owned by companies serve as collateral for loans or other financial activity to which they or any of their affiliates are a party and (3) any risks faced by companies related to regulatory developments in the crypto space , among other disclosures. The guide notes that the sample comments are not intended to serve as an exhaustive list of crypto-related disclosures, and companies should assess how they may have been individually affected.

Footnote

1. As of December 2021, more than half of the largest publicly traded crypto miners were headquartered overseas.

Originally Posted by Capital Markets Compass | Number 4

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

Mr. Michael TremeskiKatten Muchin Rosenman LLP525 West Monroe StreetSuite 1600ChicagoIL 60661USA Tel: 3125778469Fax: 3125774678Email: [email protected]: www.kattenlaw.com

© Mondaq Ltd, 2022 – Tel. +44 (0)20 8544 8300 – http://www.mondaq.com, source Business Briefing

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