Crypto Exchanges Turning to Reverse Mergers: Will They Succeed?
Hong Kong Stock Exchange regulators have been repeatedly kicking the can down the road on approving crypto-related IPOs. In response, a few Chinese crypto exchanges are aggressively pursuing reverse mergers, an alternative and unconventional way to become a publicly-listed company. Are the mergers worth the fuss?
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Looking at Crypto Reverse Mergers
Cryptocurrency exchanges were, like other stakeholders in the space, victims of the 2018 cryptoeconomy correction where major digital currencies lost over 80 percent from their peaks.
In an attempt to survive and thrive through the bear market, a few Chinese crypto exchange giants have recently been looking to take their companies public in Hong Kong.
However, instead of going through the time-consuming and complex traditional method of conducting an Initial Public Offering (IPO), these enterprises are rather opting for a quick alternative: reverse mergers, also known as reverse IPOs or back-door listings.
With that said, a reverse merger is an unconventional way of getting in public markets. It involves a private company buying a lion’s share in a publicly-listed company and then merging the two companies. At that point, the private enterprise goes public and bypasses bureaucratic ho-hum.
Among the most recent cryptocurrency exchanges going the route of a back-door listing deal is OKCoin, the world’s second biggest crypto exchange by market cap. Indeed, OKCoin’s parent company has closed a reverse merger with LEAP Holdings Group, a construction firm after acquiring controlling stock interest at $60 million USD.
Similarly, Chinese crypto exchange heavyweight Huobi purchased the majority of shares in the Hong Kong-based Pantronics Holdings Ltd.. last year. The reverse merger deal is estimated to have cost Huobi upwards of $70 million.
Where There’s a Will …
The Hong Kong stock market has witnessed an increasing number of reverse mergers due to its reluctance to date towards crypto-related IPO applications.
Last year in September, the world’s leading crypto mining equipment manufacturer Bitmain filed an IPO there. However, the Hong Kong stock market regulator has been lingering to approve the application.
In recent statements about that application, Hong Kong Exchanges and Clearing Limited (HKEX) CEO Charles Li Xiaojia said that businesses need to have a “sustainable business model.”
Apart from Bitmain, other bitcoin mining chip manufacturers Canaan Creative and Ebang Communication had filed IPO application last year in May and June respectively.
According to Hong Kong market regulators, however, a formal regulatory framework for crypto-related businesses is necessary before approving crypto-centric IPO applications.
“It is premature for any cryptocurrency trading platform or business associated with the industry to raise funds through an IPO in Hong Kong before the proper regulatory framework is in place,” a source close to those regulators reportedly told the South China Morning Post last year.
Thus, Hong Kong, which was once a haven for crypto firms, is now slowly losing its shine for some. As such, Canaan Creative is apparently pondering whether to launch its IPO in New York instead.
And Canaan isn’t the only crypto company eyeing the U.S. market. South Korean cryptocurrency exchange Bithumb is also seeking to go public in the US via a reverse merger, reports this week indicated.
Is Going Public Worth It?
Of course, in going public you can still lose money.
For example, last year Michael Novogratz’s Galaxy Digital acquired a Canadian startup and backdoored it to catapult onto the Toronto Stock Exchange (TSX).
Then in August, the merger firm Galaxy Digital LP debuted at the TSX, opening at $2.75 Canadian dollars. Currently, the stock is trading at $1.49 Canadian dollars, down by 45% since the launch.
Similarly, shares of Pantronics Holdings, which Huobi backdoored with, have not seen a major uptrend recently. So these reverse mergers most certainly haven’t proven to be catch-all solution to boosting revenue.
Should crypto companies pursue traditional IPOs or reverse mergers? Share your views in the comments section.
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