SEC Scrutiny Keeps Some Crypto Firms From Going Public

Crypto-focused companies including Bullish Global, Circle Internet Financial and eToro Group Ltd. have failed to secure SEC approval that is required for companies going public. Companies were seeking stock-exchange listing through mergers with special-purpose acquisition companies, an alternative route to going public, ahead of increased regulatory scrutiny and market turbulence in 2020 and 2021 to end the SPAC boom. done.

Another crypto broker, Galaxy Digital Holdings Ltd., has faced repeated questions from SEC staff about its business since filing paperwork to go public on the Nasdaq stock market, according to people familiar with the inquiry. . Galaxy, which is not using a SPAC structure, announced in March 2021 that it intends to become a US-listed public company and is expected to pass an SEC review by the end of that year.

The SEC did not set out to stop the companies from going public, according to a person familiar with the matter, but crypto firms believe the pace of the agency’s review hurt their efforts, especially a well-known Following the cryptocurrency crash and the failure of a large crypto hedge fund that affected several exchanges and lenders. The bankruptcy of crypto exchange FTX and a bear market in digital asset prices may keep the door shut.

Most crypto firms say that their digital assets are not securities, and therefore do not need to comply with investor-protection regulations. SEC Chairman Gary Gensler disagrees and says that most of the industry does not comply.

“Anyone bringing a crypto deal to the SEC should realize that there is going to be a lot of friction,” said Scott Kimpel, a partner at the law firm Hunton Andrews Kurth LLP.

The agency dominates when companies seek to access public markets. SEC accountants and attorneys ask potential securities issuers questions about financial disclosure, legal risk, the effects of market disruption, and other topics. The SEC says that it only examines disclosures to ensure that they provide investors with the information required by law.

Potential issuers want the process to end with regulators deeming the company’s disclosure “effective” that its shares are good to be sold to the public. Bullish, Circle and eToro haven’t gotten there yet. The SEC reviewed their go-to public filings for about a year or more, according to regulatory records, and declared them not effective.

When Coinbase Global Inc went public in 2021, the SEC sent the company three letters with questions. Bullish, in contrast, responded to more than 10 letters over a year, according to people familiar with the letters.

Galaxy, which first filed paperwork with the SEC to go public in the US in October 2021, received a letter from the SEC with more than 90 questions, according to a person familiar with the matter. Galaxy, whose shares are down about 80% from their peak over the past year on the Toronto Stock Exchange, hopes it will eventually be able to overcome the SEC’s hurdles, said a person familiar with the company.

Galaxy Digital CEO Mike Novogratz said on an August 2022 conference call that it was “disappointing that it took as long as it did.” A Galaxy spokesperson declined to comment further.

Many crypto firms that went public after Coinbase faced another challenge: their partnership with the SPAC set a strict deadline for closing the deal.

A SPAC is a shell company that raises funds from the public and plans to use the funds to combine with a private company. A SPAC typically has up to two years to find its merger partner and complete the deal. If the deal cannot pass the SEC’s review process in time, or it stalls due to other problems, the SPAC must return the money.

Last February, Circle pushed back the timetable for its merger with the SPAC Concorde Acquisition Corp., setting a new deadline of December 2022.

Circle worked last year to address questions raised by the SEC with its disclosures, which at one point numbered more than 100, according to people familiar with the discussions. As of early November, the company had only a handful of comments left, and it looked like the deal could meet its deadline, the people said.

Then crypto exchange FTX filed for bankruptcy on 11 November. Circle said it has no major affiliation with FTX. The SEC subsequently proceeded more cautiously with the Circle’s review, the people said.

Following the implosion of FTX, the SEC released a list of 16 questions it wanted crypto companies to address in public filings, some of which were relevant to the firms under review, according to a person familiar with the review.

The person said several factors made the filing challenging for review, including changes in businesses during the review period.

Circle and Concorde canceled their deal in early December. “I think it’s been a thorough process,” Circle chief executive Jeremy Allaire said at the time of the SEC settlement. “Unfortunately it was a longer process than we expected.” Circle spokesperson declined to comment further.

eToro also gives users access to stocks, but the SEC’s questions to eToro focused on its crypto business, said a person familiar with the questions. According to the filing, the company’s crypto trading accounted for 63% of commission and interest income in the first half of 2021. The person said the SEC was particularly focused on the accounting treatment eToro applied to digital assets held for users, and that it sometimes took months to respond to eToro’s letters.

eToro said in a statement that it believes it will become a public company in the future but that it will “wait for the right opportunity to take this step.”