Major digital currency exchange Coinbase filed an S-1 registration statement in December 2020, a document that a company must submit before holding a direct listing or an initial public offering (IPO).
If a company wants to offer securities under the Securities Act of 1933, it is required to file an S-1 with the U.S. Securities and Exchange Commission (SEC).
Coinbase Global, Inc. filed this document confidentially, meaning that until the exchange offered further clarity, investors had little in the way of details.
While several media outlets reported that the major digital currency exchange was going to hold an IPO following this announcement, Coinbase revealed in January 2021 that it was planning on holding a direct listing. Coinbase indicated that it plans to offer shares of Class A common stock through this listing.
This direct listing could have significant implications, providing opportunities for investors. Also, some have interpreted Coinbase's decision to file an S-1 form as signaling that Bitcoin is enjoying more widespread adoption.
Coinbase Offering Details
Market observers know that Coinbase filed an S-1 registration statement, a development the exchange announced 17 December 2020. "The Form S-1 is expected to become effective after the SEC completes its review process, subject to market and other conditions," the exchange said at the time.
After the exchange submitted this document, several media outlets reported that Coinbase had filed for an IPO. CNBC, for example, published an article in December 2020 stating that the exchange had taken the first step toward holding one of these sales. This major media outlet was not alone, as Business Insider also reported that Coinbase had filed for a primary offering.
However, a CoinDesk article pointed out that the exchange's filing of an S-1 registration statement does not necessarily mean that the organisation plans to hold an IPO. A business can also file one of these forms if they are looking to hold a direct listing. A direct listing differs from an IPO in that it involves offering existing shares instead of selling new ones.
On 25 February, the SEC published Coinbase's S-1, helping provide clarity to interested investors. The document revealed some interesting tidbits. More specifically, it indicated that at the end of 2020, the exchange had 2.8 million "Monthly Transacting Users," compared to 1 million such users as of the conclusion of 2019. In other words, the number of these users more than doubled, climbing by roughly 180%.
These active users compared to a total of 43 million "Verified Users" at the end of 2020, up from 32 million at the same time in 2019, which resulted in a more modest increase of roughly 34%.
Further, the S-1 specified that at the end of 2020, Coinbase had more than US$90 billion on the platform, compared to nearly US$17 billion at the conclusion of 2019, representing an increase of more than 430%.
Coinbase offered further detail on 17 March 2021, when it filed a revised S-1 with the SEC. According to this updated document, the exchange registered almost 115 million shares of Class A common stock. Further, the S-1 registration statement revealed that this direct listing could bring in a maximum of roughly US$940 million.
The exchange provided additional updates on key metrics, stating that "Today, our platform enables approximately 43 million retail users, 7,000 institutions, and 115,000 ecosystem partners in over 100 countries to participate in the cryptoeconomy."
What Is Coinbase?
Coinbase was founded in 2012, and it's the biggest digital currency exchange headquartered in the U.S. At the time of this writing (February 2021), the exchange boasted more than 43 million investors in more than 100 countries.
In October 2018, Coinbase held a US$300 million funding round that granted it a valuation of US$8 billion. This compared to the valuation of US$1.6 billion that the company had after raising funds in August 2017.
Coinbase has touted itself as being "the safest, most secure place to buy and sell bitcoin, ethereum, and more." The exchange has extensive information in its Help section, which advises people to leverage techniques like two-factor authentication and establishing a strong password."
In spite of the efforts Coinbase has made to educate its users and help provide them with adequate security, some investors have claimed their accounts were hacked. One Reddit user, for example, said they suffered a hack as a result of a "SIM swap attack." These attacks take place when a nefarious actor (like a hacker) gets ahold of a person's SIM card, enabling them to access an account held by that individual.
Further, it was reported in June 2018 that Coinbase users had filed more than 130 pages worth of complaints about the exchange with the SEC, with allegations that ranged from a lack of responsiveness to claims the company was "acting criminally."
It was reported at the time that as the digital currency markets reached record-high valuations in 2017, Coinbase struggled to keep up with growing interest in its trading services.
Further, the exchange has suffered service outages, where Coinbase went down during times of significant trader interest. These periods of inaccessibility provoked angst on social media, with some Twitter accounts responding with sarcastic remarks.
One Twitter handle went so far as to say "if you want to IPO this need to be fixed, you HAVE to be able to handle massive traffic spikes. It's not a new issue - it happens EVERY bull run. Unacceptable."
Coinbase Responds To Concerns
Coinbase has acknowledged these problems, with Tina Bhatnagar, the company's VP of operations and technology, penning a blog post in May 2018 stating: "In 2017, the cryptocurrency space experienced a profound uptick in mainstream awareness and growth. As part of that consumer demand for our services increased by 40x and we experienced transaction volumes in November and December of that year that grew by 295%."
In early 2021, Coinbase disclosed further plans for improvement, revealing it would upgrade its infrastructure in an effort to improve the uptime of the exchange. Following a service outage that took place between 6-7 January 2021, the organisation revealed that it was going to divide its "monolithic application server into separate discrete services." Basically, the exchange wanted to separate these so that the impact resulting from any technical errors would be less widespread.
Investor Implications For Coinbase Direct Listing
If Coinbase follows through with its plans to hold a direct listing, the securities it sells could provide opportunities for investors. More specifically, purchasing securities made available through such an offering could grant them significant potential for upside. The simple fact that Coinbase, a big player in the digital currency space, may be holding a direct listing could be interpreted as a sign of the industry's continued maturation.
However, investors should keep in mind that investing in direct listings can be risky. Since any securities sold this way would be offered by Coinbase investors and employees, they could display substantial volatility.
More specifically, companies holding direct listings don't work with investment banks like those holding IPOs would, a situation that would help provide liquidity. If Coinbase holds a direct listing, people can't purchase the securities offered unless the exchange's investors and employees want to sell them.
Since the price of the securities being offered is not determined before the direct listing takes place, it is a function of supply and demand. As a result, it can fluctuate significantly.
Investors can always benefit from doing their own research, but performing one's due diligence may be even more important for those thinking about purchasing securities through direct listings, since these offerings don't involve roadshows.
Roadshows have traditionally involved representatives of companies planning IPOs traveling to present their business to potential investors. This trip includes "a nationwide series of lunches, breakfasts and dinners," and a particularly visible IPO could draw hundreds of investors to one of these events.
Major cryptocurrency exchange Coinbase filed a confidential S-1 registration statement in December 2020, a document that companies submit to the SEC if they want to hold an IPO or a direct listing. After the company provided this statement, several media outlets reported that Coinbase had filed for an IPO.
If the exchange, which was most recently valued at US$8 billion, holds a primary offering, it would be the largest crypto company to go public thus far. Several industry firms have gone this route, but they're all smaller.
A Coinbase IPO could give investors the opportunity to buy the securities of a major exchange that could potentially benefit from strong growth in both trading activity and revenue. However, investors should keep in mind that these primary sales can be risky.
This article was last updated on 30th March 2021.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…