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The Hong Kong Stock Exchange (HKEX) is reluctant to approve the initial public offering (IPO) applications of the Chinese bitcoin mining machinery manufacturers, according to a person involved in the talks.
After the boom in the cryptocurrency market 2017, the mining giants Canaan Creative, Ebang and Bitmain have applied in May, June and September of this year, respectively, to sell shares on HKEX. The offer of Bitmain, in particular, was seen as a watershed moment, as it marked the first time that an important encrypted startup tried to make public.
But the 2018 bear market emphasized the highs and lows of the crypto-space, making the exchange with the list of such companies nervous, the source told CoinDesk. The application of Canaan Creative has already expired, and the other two are faced with a high bar in convincing HKEX.
"The exchange is very hesitant to actually approve these bitcoin mining companies because the industry is so volatile, there is a real risk that they could no longer exist in a year or two," said the person, who asked anonymity because the information is private, adding:
"The HKEX does not want to be the first exchange in the world to approve it and kill one of them."
A spokesperson for HKEX said that the exchange does not comment on individual companies or individual listing applications. Bitmain declined to comment, citing his pre-IPO quiet period, while Canaan Creative and Ebang did not respond to CoinDesk requests for print time.
Taking a step back, the IPO process in Hong Kong begins with a company presenting a draft prospectus with HKEX. Then the exchange will begin talks and questions back and forth with the candidate.
If the application is approved by HKEX and the Securities and Futures Commission (SFC), the Hong Kong Financial Regulatory Authority, the case will proceed to a quotation hearing, during which the size of the offer and the price of the shares will be decided and made public.
However, if an applicant does not arrive at a quotation hearing after six months from filing, the application lapses, which means that the case is no longer active, although the applicant may choose to reactivate the case later if he wishes to continue fundraising.
The request for Canaan expired in November, after the company failed to appear on the list for six months after its deposition in May. Ebang, which was presented on June 24, is only two weeks from the end of the six-month window. Bitmain, the best known of the group, is almost halfway through the six month period.
"Right now, I do not think any of them could get to the listing hearing," the source said, noting that both HKEX and SFC must sign. "If one of the two does not approve it, you can not do it at the hearing of the quotation."
High obstacles
Lawyers familiar with the IPEX process of HKEX called his hesitation to list understandable mining companies.
In addition to basic listing requirements such as financial track record records, HKEX also focuses on "business suitability and sustainability and how risky it is for retail investors," said Ivy Wong, partner of law firm Baker McKenzie at Hong Kong.
"I have seen cases where candidates could meet the basic listing requirements for the three-year track record, but they could not convince the HKEx that its business is sustainable, and HKEX was reluctant to grant an approval. listing, "he said.
Frank Bi, partner of the international law firm Ashurst of Hong Kong who regularly collaborates with public companies, has echoed this point.
"HKEX will be particularly cautious and concerned about regulatory uncertainty stemming from the IPOs of bitcoin mining producers in Hong Kong," he said. "Coupled with the potential market speculation that has been recently reflected on the price of bitcoins, it is even more difficult to present a sustainable business model for this industry."
Neither Ebang nor Bitmain have disclosed their financial data for the third quarter of this year, when the cryptocurrency market started to record a significant decline.
"If there is a significant decrease in their income, profits or losses, they have to disclose it, it's something that worries the exchange," said the source who is familiar with the speeches.
The source went on to explain that the exchange is taking advantage of the fact that the cryptography market is not available at the moment because, even if it does not want to approve the requests, it does not have the grounds to refuse them outright.
"What they are doing is that they are dragging the case right now," the source said, adding:
"If the market continues to rise, the exchange can be pushed to approve the cases, as the whole industry is doing, but as the market is falling, these companies must really justify [how] this sector is sustainable ".
Bi said that two common reasons for IPO delays in Hong Kong are a failure on the part of the applicant to provide due diligence and disclosure to the satisfaction of HKEX and market conditions where a realistic valuation is different from what existing investors want for their exit.
"HKEX has always been known to be cautious in scrutinizing candidates' activities and their sustainability," Bi said.
More than mines?
An approach that bitcoin mining producers have tried to justify their business models at HKEX is to establish themselves as having different lines of business, such as research and development in artificial intelligence, telecommunications and blockchain, according to the draft of the registrations.
For example, Bitmain claimed to be a "strong competitor in the field of artificial intelligence chips" in its prospect draft, potentially joining the ranks of technology giants such as NVIDIA and Google.
"Thanks to our success and our experience in ASIC chip design and our powerful research and development capabilities, we have extended our attention to the revolutionary field of IA and have achieved promising results", said the company in the depot.
Bitmain said it had launched its pilot AI BM1680 chip in the second quarter of 2017, which "works as a processor for accelerating the calculation of the tensor for deep learning, applicable to training and inference. on artificial neural networks ".
But these arguments do not go very well to HKEX, according to the source involved in the talks.
"In reality, what they are is that they are only producers that focus mainly on bitcoin mining machines, and if all this history of mining tanks, these companies will probably pity them," the source said.
Bi agreed, telling CoinDesk that while these companies have made declarations on the expansion of their business models beyond the mining encryption, "it is likely that encryption activities and encryption holdings are still the majority of their revenue" .
Another factor that can harm these companies the possibility of approval is their vast wealth of cryptocurrencies whose value has fallen sharply in the last six months.
"Coupled with a limited number of commercial operations and the substantial recent decline in cryptographic values, it probably means that regulators will particularly examine their businesses," Bi said.
Bitmain, for example, revealed that as of June 30th this year, it had $ 886.9 million in cryptographic assets, including bitcoins, bitcoin money, ether, litecoin and dash, among others.
Although it did not disclose a subdivision into coins for coins, the data of Crypto-Economics Explorer of CoinDesk show that all the cryptocurrencies mentioned have recorded a significant drop of at least 50%. Among these, the bitcoin money saw the most significant decline following the recent hard fork war, in which Bitmain played a role in driving the Bitcoin Cash ABC field.
"E & # 39; [the crypto holding] it certainly does not help the case, because you're just adding more risks. Now it's not just your income at risk, but your budget too, "said the source.
Status symbol
To be precise, going public is not necessarily a matter of life or death for Chinese mining companies.
"These companies – Ebang, Bitmain and Canaan – want regulatory approval and the status of a listed company, but as far as the real financing needs are concerned, they actually have a lot of money because they have done a lot in the last year. year, "said the source who is familiar with the discussions.
In fact, the boom in 2017 has helped mining producers in China to generate exponential revenues and profit growth.
Bitmain, Cannan and Ebang earned $ 1.2 billion, $ 56 million and $ 60 million respectively in profits last year. Furthermore, significant growth has led to a huge increase in corporate earnings for their key executives.
According to the documents, the founders of Bitmain, Ketuan Zhan and Jihan Wu, for example, received $ 22.7 million and $ 20.4 million as discretionary bonuses for 2017, respectively, while their annual salaries were both $ 27,000.
Wong said the companies The reasons for looking for IPOs can vary: some do it for the profile and presence on the market while others do it to raise funds and make money.
"My hypothesis is that they [miner makers’] The reasons are probably mixed, together with the desire to create a market precedent and to be the first engine on the market, "he said.
More generally, Wong said thatIt may be too early to say the success or failure of any of these cryptographic societies, since the market is still relatively young and we still have to see how they emerge and develop.
He concluded:
"It is, in any case, an interesting thing to see that it is able to provide investors with more investment options and satisfy the various risk appetites in the market".
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