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If 2021 was the year when crypto SPACs became mainstream, 2022 was the year of what could have been. This week, Peter Theil-backed crypto exchange Bullish finally called it quits on its $9 billion merger with Far Peak Acquisition Corp, nearly seventeen months after announcing the transaction in July 2021.
Bullish isn’t the only though; several large Crypto SPAC transactions, like Circle, Roxe, and eToro, have all been called off their mega-mergers this year due to regulatory hell.
Couple that with a worsening macro backdrop and plummeting crypto prices, and things look worse for those crypto companies that have gone public already. So what does 2023 hold for crypto SPACs, new and old? Let’s take a look.
This week, Core Scientific, one of the largest cryptocurrency miners in North America, filed for bankruptcy protection. Core Scientific has had a wild ride, first debuting at a $4.7 billion valuation, declining by 98% to a valuation of close to $78 million. While macroeconomic headwinds such as inflation and higher interest rates are part of the problem, the industry as a whole has suffered reputational damage leading to the decline in major digital assets.
Major players in the industry like crypto exchange FTX, lender BlockFi, Voyager and Celsius, and Hedge Fund Three Arrows all blew up, wiping out tens of billions in the capital along the way. Given the kind of leverage traders employ in the industry, it is no surprise that over $2 trillion of value has been wiped off the industry since the peak last year. Bitcoin is now down over 75%, while Ethereum is down 73% for the year.
The fundamental weakness in the cryptocurrency market is not the sole reason for bankruptcies in the sector. In fact, most companies that went public through SPACs in 2020 and 2021 are at risk of running out of cash. This year alone, half a dozen firms that went public over the last two years filed for bankruptcy protection.
A report from Bloomberg in October showed that nearly one in three De-SPACs were trading below $2 (with some potentially at the risk of being delisted from Nasdaq/NYSE), while nearly 40% said warned of liquidity issues and possible going concern (bankruptcy) warnings. While some of this can be attributed to the growth-at-all-costs mentality employed by these firms, another reason for liquidity concerns is that SPACs have yielded just a fraction of the cash promised compared to the time of the deal announcement. On average, redemption rates have skyrocketed to 85% in 2022, so even those companies that will debut through deals next year may face a significant cash crunch.
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Deal Breakups On The Rise
A string of Mega Crypto SPAC deals has been called off in recent months, mostly due to the Securities and Exchange Commission’s increased oversight and involvement in such deals. Victims include European Stocks/Crypto platform eToro, which first saw its transaction value slashed by 15% (from $10.4 billion to $8.8 billion) before calling off the deal.
Stablecoin Issuer Circle doubled its valuation after revisiting the terms of its deal but had to call off the merger a few weeks prior due to the deal timing out. The latest victim was Peter Theil Backed crypto exchange Bullish, which saw its $9 billion deal being called off over seventeen months after announcing it.
Other exchanges that scrapped deals earlier in the year include Japanese crypto exchange Coincheck and New-York digital asset trading firm Apfiny group. Several other cryptocurrency-focused deals were announced late last year/early 2022 and may similarly never see the finish line. This includes Cloud Mining firms Bitfufu and Bitdeer, Bitcoin Miner Griid Infrastructure, and Japanese Crypto exchange Coincheck have all been or will be waiting for over a year before receiving regulatory approval.
Crypto companies going public will not only face regulatory uncertainty but will also need to deal with additional challenges like macroeconomic headwinds, reduction in user base/revenue due to the declining sentiment, and significant margin compression due to lower digital asset prices and higher costs.
Regulation, Regulation, and More Regulation
The truth is that the SPACs + Crypto deal is most certainly a regulators nightmare, requiring twice the due diligence that would go into a normal blank-cheque transaction. It makes sense from Gary Gensler’s perspective; they clearly don’t want another FTX implosion, especially in the public markets. The evidence is clear: Crypto companies that have gone public have fared far worse than the average De-SPAC, plunging between 55-99%.
Of the seven crypto companies that have gone public recently through SPAC deals, only two are trading above $2, while only cryptocurrency storage solutions company CompoSecure is trading above $4. This year, the SEC has made sweeping changes for SPACs and Cryptocurrencies, especially regarding disclosures, conflicts, and other accounting issues.
In March, the regulator stated that any public company holding crypto assets for their clients must account for it as liabilities due to the technological, legal, and regulatory risks. This is especially problematic for exchanges and financial companies that need to hold cash on the balance sheet against these liabilities due to the strict capital requirements. The SEC plans to further introduce regulations and disclosures for publicly listed crypto companies in 2023, raising the bar higher.
Both Circle and Bullish had to revise their paperwork more than half a dozen times, but they still failed to get the merger through in time due to the lack of clarity from the SEC. Looking at the FTX, Celsius, and Voyager blowups, it only means that the SEC has more room to tighten and enforce regulation next year. The implications of this could range from legitimizing the industry to shutting it down completely.
SPACs set to take cryptocurrency companies public in 2023 will have significant challenges, including potential bankruptcies, deal breakups, and impending regulations. Founders, Dealmakers, and Regulators will need to work hard to reshape the industry and bring back legitimacy.