On December 17, 2020, Coinbase announced on its blog that it had filed Form S-1 with the Securities and Exchange Commission (SEC), an initial step towards holding an initial public offering (IPO). The details of the application are still scanty, though.
Meanwhile, around the same time, reports concluded that the Israel-based brokerage, eToro, was also planning its own IPO to happen sometime this year.
It is reported that eToro seeks to be listed on one of the stock exchanges in the US and is talking to Goldman Sachs about getting technical help with the process. Just like with the Coinbase one, little is known about the eToro lPO.
Coinbase is the largest crypto exchange serving the US market. In addition to facilitating the conversion between cryptos and fiat, it also supports crypto assets trading through its Global Digital Asset Exchange (GDAX) platform.
Likewise, eToro is one of the largest trading platforms that supports the trading of both traditional assets and cryptos. Its valuation has been disclosed to stand at about $5 billion.
Coinbase and eToro IPO Significance
If these two companies successfully execute the planned IPOs, they will be the first in the crypto space to do that. That will be a huge milestone not only for them but also for the crypto market and the global mainstream financial system.
But even more importantly, it will signify the crypto industry coming full circle.
In 2016 and 2017, a company in the crypto space seeking to be listed on a stock exchange is a happening many, especially blockchain enthusiasts, would not foresee. The general belief was that the concept of IPOs was in the past and that we were at a major turning point.
The expectation was that crypto companies would only raise and manage equity on the blockchain. If anything, the mainstream companies were expected to join blockchain startups in using the new method of raising and managing capital.
The blockchain process was called Initial Coin Offering (ICO), and it involved a startup or a company creating tokens and selling them to the public using a smart contract on the blockchain.
Besides how the share capital is created and issued, ICOs were different in other ways from traditional IPOs. For example, a business did not have to have been in operation long to hold an ICO.
An entity a few months old would qualify, just like a company with decades of doing business. What mattered was the ability to persuade the public about the business’s potential to grow over time.
Also, anyone from any part of the globe could buy the tokens. It was not necessary to be an accredited investor to participate.
Last but not least, the expected returns on investment were not the same. While shareholders expect dividends, token holders expect a premium product or access to a platform.
Tradition is Winning
For a moment, it seemed like the mainstream businesses were crossing over. For example, Kik and Telegram, both instant messaging mobile apps, were businesses one would expect to follow the traditional channel of growth that leads to an IPO and listing on a stock exchange.
They, however, chose to do ICOs, and theirs turned out to be among the largest. Telegram raised close to $1.2 billion while Kik raised about $100 million.
And then the regulators got involved. In particular, the Securities Exchange Commission (SEC) demanded that the startups raising capital from American citizens through ICOs had to abide by the rules that guided IPOs and securities issuance in general.
The exception was those startups or platforms selling tokens that were clearly for utility purposes. In other words, the users of a particular product or service need the token for access.
The demands by the SEC brought to a stop the holding of ICOs. The regulator even pursued those that had already raised capital through this new method.
It sued Telegram and Kik for raising capital without abiding by the rules and regulations in place. Telegram has since chosen to refund the money to its investors.
To meet SEC's demands, startups started holding what was known as security token offering (STO). This was a somehow toned down version of ICO.
While the tokens were created and sold on a blockchain, the issuing entities tried as much as possible to do things as expected by the regulator. For example, those who could buy the tokens had to be accredited investors according to the SEC’s requirements.
This seems not to have worked well for many, and the enthusiasm was gone. It was also a learning experience for both the businesses and the regulators. Nobody knew exactly what was right or wrong to do, and that consumed time and resources.
A Convenient Way to Raise Capital?
It seems the likes of Coinbase and eToro, startups, which in 2017 seemed perfect for ICOs, have chosen the traditional way of raising capital. They seem to have even overlooked going the STO way. However, it is not clear whether they will seek to manage their equity on the blockchain after the IPOs are done.
Nevertheless, choosing to go the IPO way could be a wise business decision. It is a convenient way to raise capital without losing the focus on their primary operations.
If they chose to do an STO or even an ICO, they could easily get bogged down with trying to second guess a regulator and trying to meet requirements that are not clear or can be interpreted in whichever way.
What It Means to the Industry
If these IPOs are successfully carried out, the crypto market will be officially welcomed to the mainstream financial system. It could change the perception many have about cryptocurrencies.
It should also not be lost to us that the IPOs are likely to happen in the biggest crypto summer ever. There is a lot of excitement right now in the crypto market with the prices of Bitcoin, Ethereum, and most of the other crypto assets hitting new all-time highs.
With the interest that follows this bullish market performance, Coinbase and Etoro are likely to record some of the most successful IPOs in 2021.