Cryptocurrency investment firm Morgan Creek Digital is attempting to raise $250 million from investors to purchase a majority stake in crypto lender BlockFi, a leaked investor call from Tuesday reveals.
Morgan Creek’s plan to rapidly assemble an equity offer was hatched in response to crypto exchange FTX’s Tuesday morning announcement that it would extend a $250 million credit line to BlockFi.
Morgan Creek Digital declined to comment. A person with knowledge of the effort said there are multiple venture capital funds that are exploring ways to provide equity financing to BlockFi as the lender struggles to stay afloat.
FTX’s $250 million credit facility offer – if inked as initially proposed – stood to effectively wipe out all BlockFi shareholders, the person said.
BlockFi has been one of the few companies to weather the cryptocurrency bear market. But the company has been hit hard by the recent downturn in prices, and its shares have suffered accordingly. The company is now facing a liquidity crunch, and is desperately seeking new sources of funding.
Equity financing would provide BlockFi with much-needed cash, but it would also dilute existing shareholders’ ownership stakes in the company.
It is not clear whether Morgan Creek’s offer will be successful. But it underscores the lengths to which some investors are willing to go to keep BlockFi afloat.
At stake is the ability of BlockFi’s existing shareholders, including longtime backer Morgan Creek, to recoup their investments.
“I’ve been making calls all day,” Morgan Creek Digital managing partner Mark Yusko said on the leaked call.
According to Yusko, the FTX credit line proposal had a catch for BlockFi’s existing shareholders: It gave FTX the option to buy BlockFi “at essentially zero price.” If FTX were to exercise said option, it would effectively wipe out all of BlockFi’s existing equity shareholders, including management and employees with stock options, as well as all equity investors in the company’s previous venture rounds.
However, Yusko said on the leaked call that BlockFi founders Zac Prince and Flori Marquez had a valid reason for preliminarily accepting the terms: Of the several emergency financing offers BlockFi received, FTX’s was the only one that would not subordinate client assets to the rescuer.
In other words, unless BlockFi went with FTX, its depositors would have had to wait in line behind the new lender to be repaid. Additionally, BlockFi had not received any equity financing options at that stage. (Yusko did not identify any of the other firms that proposed bailout packages for BlockFi.)
BlockFi CEO Prince tweeted on June 21 that the company had signed a preliminary term sheet with FTX. Yusko told investors on the leaked call that day that FTX and BlockFi were “probably three days away from signing a definitive agreement.”
“I cannot stress enough how important it is that we get this deal done,” Yusko said.
On the call, Yusko asked investors to commit $25 million each to a Morgan Creek-led equity investment in BlockFi. The firm would then purchase a majority stake in BlockFi at a “huge discount,” he said, and work with management to turn the company around.
Yusko told investors that he had already lined up $50 million in commitments from three limited partners, and was hoping to close the deal quickly.
“This will be the last time that you can get in on the ground floor of BlockFi at anywhere near these prices,” Yusko said.
A person familiar with the situation said that, as of Tuesday afternoon, Morgan Creek had not yet secured any commitments from investors.
The firm’s offer is the latest example of the lengths to which some investors are willing to go to keep BlockFi afloat.
BlockFi has been one of the few companies to weather the cryptocurrency bear market. But the company has been hit hard by the recent downturn in prices, and its shares have suffered accordingly. The company is now facing a liquidity crunch, and is desperately seeking new sources of funding.
Equity financing would provide BlockFi with much-needed cash, but it would also dilute existing shareholders’ ownership stakes in the company.
According to Yusko on the leaked call, in the event that FTX exercised its option after extending the credit line, only investors in the most senior tranche of the company’s latest raise would get back anything, and even that would amount to pennies on the dollar.
Morgan Creek, which participated in several funding rounds for BlockFi, would be among those holding the bag.
“The only alternative is to raise an equivalent amount in equity and that’s what we’re working on,” Yusko told investors on the call. “I would say it's a 10% possibility but not zero.”
A recording of the call, which CoinDesk reviewed, offers a rare window into the closed-door negotiations to rescue BlockFi, one of the crypto industry’s largest lenders, amid a meltdown in the digital asset and broader financial markets. It also shows how the current turbulence echoes past financial crises, with Yusko comparing FTX’s rescue package to J. Pierpont Morgan’s bailout of the Knickerbocker Trust in 1907 .
Indeed, Wall Street firm Goldman Sachs has been trying to organize an investor group to scoop up assets of another troubled crypto lender, Celsius Network, at steep discounts in the event that the company files for bankruptcy.
“It's not over, but it is definitely looking dark,” he said.