The surge of crypto SPACs is drawing comparisons to the ICO era

Michael Bucella, a partner at crypto investment firm BlockTower, knows a thing or two about special-purpose acquisition companies (SPACs), the latest fundraising mechanism to gain traction in the crypto industry.

Bucella saw the maturation of the market for SPACs — a way companies can go public by being acquired by an already listed entity — in real-time. Before joining BlockTower, Bucella cut his teeth at Goldman Sachs, where he spent nearly a decade across its asset management and securities division, most recently as head of multi-asset for Canada.

In those days, Canada was considered the SPAC capital because many of the largest SPAC portfolios were based there. And SPAC was a dirty word. Now, in many ways, the current crypto SPAC market is beginning to resemble the SPAC market of yore, according to Bucella.

In particular, he said, many companies in the space are raising without a product. Bucella pointed to Bullish, the yet-to-be-launch crypto exchange, as one example. 

The exchange, which announced its own SPAC deal earlier this month, clinched a $9 billion valuation despite not having a live product on the market. Bakkt, the digital asset platform launched by Intercontinental Exchange, also announced a SPAC deal this year. At the time, it had yet to launch its much anticipated retail application. The app went live this past spring. 

Bucella said that firms can clinch lofty valuations and even raise large sums of money via private deals ahead of the SPAC. That was the case with Bullish, which raised $300 million in a private placement deal. 

In a sense, this reflects the frothiness of the broader private markets in crypto, but it also means more money can flow into crypto projects. "It opens up capital markets in a much larger way than ever before," Bucella said.

2017 redux?

Others are more skeptical, noting that recent raises evoke the heady days of the initial coin offering (ICO) era, during which blockchain projects were able to raise millions with just a white paper and a dream. 

"That's a good parallel," FTX CEO Sam Bankman-Fried told The Block recently. 

"The big advantage of a SPAC that didn't register until I started looking at what other companies were doing is you can give forward guidance," Bankman-Fried said. In other words, companies can make projections of future users and revenues — even if there's no historical data to support such claims. 

For instance, at the time of its SPAC announcement, Bakkt projected that its user base would go from zero in 2020 to 31 million in 2025 — a number that would trounce the user bases of Cash App and Robinhood as of the first half of 2020. 

"Man would I like to be the guy who typed '0' into the deck and then was like ‘yeah, totally, 30m, that's what 0 projects to,’" Bankman-Fried said in a tweet mocking Bakkt's deck at the time of its release. 

Circle, which announced a SPAC deal of its own earlier this month, has its own lofty projections. The firm forecasts that its total number of accounts will surge to 30,000 from 2,700 over the next two years

To be fair, the projections provide a way for companies in more nascent industries (not just crypto) to illustrate the growth potential of a firm, said Karen Snow, an executive at Nasdaq. 

“It's common with bio-techs for example,” said Snow, who joined Nasdaq in 2018 after 18 years at Credit Suisse. “They raise capital off of early scientific evidence. There is certainly no guarantee it will work. They size the market and project what their revenues might be. Commercial space and electric vehicles are two other good examples.” 

Still, some crypto SPACs are shying away from lofty forecasts. In a recent episode of The Scoop, former NYSE president Tom Farley, who's set to be the CEO of Bullish, said his company tried to avoid such projections. 

"We actually did not publish projections to our potential investors when we were marketing the PIPE (private investment in private equity),” said Farley. "This investment has a whole lot of upside, but it's highly speculative," Farley said.