With exchanges, regulators and investors alike still trying to catch their breath, a few small public companies have fallen on a golden formula.
Listed companies around the world, almost exclusively of microcap size and with questionable (if not outright failing) performance in their supposed core industries, are announcing bold restructuring and re-strategizing plans. Within a matter of days, their shares jump hundreds if not thousands of percent in value.
What they have in common: entrance into the cryptocurrency sphere (the most well-known product of which is the original bitcoin) and/or blockchain technology on which digital currencies are based. Here is a quick review:
- Longfin (NASDAQ:LFIN) only had its IPO a few days ago, December 12th. Shares, however, exploded on the 15th on announcement of the purchase of a blockchain company. LFIN’S own CEO described the valuation of his company as “insane”: from a post-IPO valuation of $410 million to a high-water mark of $10.8 billion.
- Overstock.com Inc., (OSTK) which added about $137 million in market cap in September after announcing the launch of a SEC-compliant digital tokens exchange.
- Riot Blockchain, Inc. (the Stock Formerly Known as Bioptix) (AGM: Dec 28, 2017): a medical device company which added $275 million in market cap in under two months after changing its name to Riot Blockchain (RIOT) and buying digital currency mining assets.
- Blockchain Holdings (the Stock Formerly Knowny as Natural Resources Holdings Ltd.): Israel’s Natural Resource Holdings (NRH), which invests in metals mines located mostly in North America, plans a shift from digging for minerals to mining digital currencies; share price increased more than 3,000% since October 17th when it said it plans to change its name to Blockchain Holdings, and since signing an agreement to take a controlling stake in Canadian cryptocurrency mining operation Backbone Hosting Solutions Inc.
At least you might say Blockchain Holdings’ owner, Roy Sebag, has pedigree; Sebag’s other metals investment firm, Goldmoney Inc. (a Toronto Stock Exchange company), said in September it would start offering cryptocurrency storage, and promptly more than doubled in value.
Regulators responding
The U.S. SEC on December 18th suspended trading in the stock of The Crypto Company (CRCW), citing concerns about the “accuracy and adequacy” of information it provided about marketing costs and insiders’ plans to sell shares. Regulators also cited concerns about “potentially manipulative transactions” in the stock dating to November. The stock, which had traded on OTC markets, surged as much as 17,000% since it began trading in September.
In Israel, normally quite welcoming to high-tech companies, start-ups and all things innovative, regulators are also taking a cautious approach. Israel Securities Authority (ISA) chief Shmuel Hauser said in a letter to the CEO of the TASE, that cryptocurrency companies should be banned from entering the exchange via a “back door”, or through the activities of an existing company that is already listed on the exchange until a proper regulatory process is in place for dealing with them.
The ISA head also said that companies whose value is based on that of the bitcoin would be prevented from entering any of the indices on the TASE.
Such a regulatory response worldwide might at least offer passive institutional investors a partial shield from the speculative antics of retail investors (excluding companies in which they are already invested and who are already listed).
Governance Implications
Take Riot Blockchain for example. The company used to focus on blood testing and animal health care. Its updated website describes its new mission: a “first mover” on the NASDAQ focused on blockchain technology, which aims “to be part of the disruptive blockchain technology ecosystem that is revolutionizing transactions.”
Shareholders looking over their proxy materials for the company’s December 28th annual meeting may be understandably confused. The board of directors up for election is completely unrecognizable from the one voted in last year (when, incidentally, the company was still formerly known as Venaxis, Inc).
It has gone from a board full of medical, biotechnology and accounting experts to a board led by its CEO, a professional investor, on which the director with the most relevant core industry experience is described as “an established professional poker player” who has been “active in the industry as a miner, studying protocol development and evaluating a variety of crypto investment strategies”. No veterinary synergies, then.
Riot’s rebranding has drawn skepticism from some quarters, with well-known short-seller Andrew Left, founder of Citron, reportedly challenging its CEO to a live debate and claiming that he couldn’t find enough instruments by which to short bitcoin-based stocks. Left also took aim at Bitcoin Investment Trust (GBTC), which in October of this year received shareholder approval to move further into virtual currencies.
Looking Ahead
Given the manic price rise of so many tradeable securities associated with cryptocurrencies, the similarities to past stock market bubbles and the general lack of public understanding regarding the technology and long-term implications, it is not surprising that some, particularly regulators, are urging restraint.
Indeed, there are evidently concerns that the bubble will be used to misrepresent a company’s profitability and strength in the cryptocurrency market; the effect on M&A also remains to be judged, with investor response to acquisition announcements also going to be mixed.
The coming months and years will give voting shareholders their own unique circumstances to consider. As formerly microcap companies balloon in price with corporate purposes a country mile away from what they originally presented to their investors, will passive shareholders who got hitched along for the ride end up thanking companies for seeing the new gold rush early enough? Or will they, and the investors who bought in since the words “blockchain” or “coin” or “mining” were added to the name, end up seeking to hold boards and managers to account for reckless forays into the digital wilderness?
Oren is an analyst covering the Israeli and U.S. markets.