INSIGHT: Coinbase Could Become First-Ever Public U.S. Crypto Exchange

Rumor has it Coinbase could be the first major player in the U.S. cryptocurrency industry to go public, and using the mechanism of a direct listing, instead of a traditional initial public offering.

Popular American-based cryptocurrency trading platform Coinbase has rumored plans to pursue a public debut later this year, or early next year—making the company the latest mega-startup to approach the public markets. The company has not yet officially announced its plans to go public, but has reportedly been in talks with investment banks and has spoken with law firms, which would mark a significant milestone for the crypto market.

Founded in 2012, Coinbase is one of—if not the—most well-known cryptocurrency platforms globally, with over 35 million users who trade virtual coins, including bitcoin, ethereum, and XRP. The New York Stock Exchange, BBVA, and former Citigroup Inc. CEO Vikram Pandit are among the San Francisco-based company’s many investors. Additionally, back in 2017, it was one of the top beneficiaries of the bitcoin BTC=BTSP boom, when the original cryptocurrency jumped from $1,000 to almost $20,000.

For the last several years, cryptocurrency exchanges and related businesses have been in limbo in the U.S., as traditional banks have shunned the industry, and the Securities and Exchange Commission has issued regulatory guidance that many digital coins are securities, following up with enforcement actions when offerings of securities proceed without complying with securities regulations.

A new stock market listing for Coinbase would lend legitimacy to other companies building the cryptocurrency ecosystem, and potentially pave the way for future IPOs.

Direct Listing Might Be Pursued

According to Reuters, Coinbase may pursue a direct listing for its shares, instead of a traditional initial public offering. A direct listing enables a company’s existing shares of common stock to trade publicly on a national securities exchange without formally pricing a new block of equity through underwriters following a traditional book-building process.

In recent years, direct listings have become much more popular to achieve efficient pricing, as private companies became less dependent on IPOs as a fundraising mechanism.

Driving this move to direct listings, some of Silicon Valley’s most elite entrepreneurs and venture capitalists have become disenchanted with the underpricing of IPOs, which sometimes force companies going public to leave tens or hundreds of millions of dollars on the table. This is because the customers of underwriters of traditional IPOs expect the IPO price to be discounted to true valuation to enable a first day bump in the post-IPO closing price of 20% or more.

Today, Coinbase is archetypal for the sort of company that might consider a direct listing: it is wealthy, having raised over $500 million during its time as a private company, and has a significant brand and following. Coinbase’s most recent private financing of $300 million valued it at $8 billion, according to data published by Crunchbase.

The direct listing process, contrary to the traditional book-building IPO, involves existing shareholders of a startup selling secondary shares to the public directly over a national securities exchange, instead of the issuer working with Wall Street underwriters to issue new blocks of shares, and those underwriters selling them on to their preferred accounts.

Like other recent businesses that have pursued a direct listing, including Spotify and Slack, Coinbase has a similar profile, with a high valuation, significant cash reserves and a substantial customer following and brand.

SEC Blessing Needed

Coinbase co-founder Fred Ehrsam recently said the company is “spiritually” built to go public through a token offering, and many of its employees would be disappointed if it pursues a typical Wall Street IPO.

However, any blockchain offering, even a hybrid one, would depend on the blessing of the SEC. And, that could perhaps be a hard bargain given the SEC’s recent enforcement actions against Telegram and other token issuers.

The term “Coinbase effect” describes the price boost many cryptocurrencies have had as a result of being listed on Coinbase, which often occurs because Coinbase is the primary gateway to crypto for many buyers. So, given Coinbase’s status in the crypto industry, a successful IPO could create a ripple effect that boosts the price of Bitcoin, Ethereum, and others.

On the other hand, if Coinbase fails, crypto prices could plummet dramatically. Additionally, Coinbase may take into account the state of the broader cryptocurrency market in deciding when to go public—as cryptocurrencies are known to be volatile, and prices and trading activities have been in a slump.

Historically, Coinbase’s financial past has been opaque, with media reporting its 2017 revenue at around $1 billion, boosted by that year’s crypto-mania. In 2018, how Coinbase performed is less clear, although media reports described its diminishing performance alongside that of the currencies that it trades.

The company’s S-1 filing will provide insight into the company’s historical financial performance, allowing the public to see how Coinbase fared during various crypto-booms and busts.

Since being founded in 2012, Coinbase has raised a total of $547 million. In October 2018, its Series E round valued the company at $8 billion. As new companies like Compound and Kyber continue to use innovative methods to provide ownership of platforms to users, a direct listing could be a cost-efficient way for Coinbase to give users access to company shares.

With public markets at an all-time high and valuations for tech stocks out-performing the broader indeces, it’s not surprising that valuable unicorns are getting ready for a run on the public markets.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Louis Lehot is the founder of L2 Counsel. He is a corporate, securities and M&A lawyer, and helps his clients in forming, buying and selling companies. He is formerly the co-managing partner of DLA Piper’s Silicon Valley office and co-chair of its venture capital and emerging growth company team.