Bitmain's New IPO Attempt in Jeopardy as In-Fighting Goes Public

Published at: Nov. 2, 2019

In 2017, Bitmain ruled the roost and all eyes were on China, but 2018 was a barren year for cryptocurrency. Prices plummeted. Companies crumpled. The long-awaited initial public offerings of two crypto mining titans, Bitmain and Canaan Creative, failed at the final hurdle as the crypto winter humbled even the most ambitious crypto companies.

But not for long. After biding their time in the shadows, following months of rumors and tumultuous events, the two hardware behemoths are filing to go public in the United States.

Bitmain bites back

Founded only six years ago by Jihan Wu and Micree Zhan, Bitmain has presided over the transformation of Bitcoin mining from a quirky hobby into a multibillion-dollar industry. In a cutthroat environment where new technological advances are the lifeline of companies trying to stay ahead of the game, Bitmain has proven itself a fearsome competitor.

Six years on, and tens of billions of dollars later, Bitmain has secured investment from major companies across the globe. Though the company seemed immortal only a matter of months ago, it has struggled to shake off the legacy of its failed 2018 IPO on the Hong Kong stock exchange, along with increased pressure from advancing competitors and disappointing financial results in 2019.

Bitmain’s controversial rise to the top and a rapid fall from grace in 2018 created dramatic headlines in equal measure. However, in an unexpected turn of events, the company discreetly filed an application with the U.S. Securities and Exchange Commission last week.

According to a Tencent report published on Oct. 30, anonymous “informed sources” claim that the German multinational Deutsche Bank is sponsoring the application, although the target for funds raised has not been made public. A Bloomberg report published in June forecasted that the amount could be between $300 million to $500 million.

Listing with the SEC is no easy feat, and the application will undergo some serious scrutiny before a decision is made. The SEC’s review process reportedly comprises of three rounds of inquiries and lasts between one and two months. A source familiar with the process told Tencent News:

"The SEC has no biased position on the blockchain business, but it is more concerned about professional and technical issues, so the SEC's inquiries will be more professional and more focused.”

However, as many have come to expect with Bitmain, the news of the IPO listing was followed by an event that could threaten to extinguish any hope of its success. Only one day after the SEC filing, Bitmain co-founder Jihan Wu ousted fellow founder Micree Zhan in what is being referred to as a “coup.” Bitmain refused to provide any further comments regarding the situation following a request from Cointelegraph.

Bitmain enjoys a 75% market share of the crypto hardware market worldwide, and this was a major incentive for prospective investors in the lead up to the scrapped 2018 IPO. However, the manner in which Zhan was forced out by his former partner is likely to unsettle investors already wary of a company that operates in the gray area.

While rumors of acrimony between the two have long abounded, it is widely known that differences became obvious after the 2018 push to go public. Since then, tougher times have followed and Wu appears to have chosen his time to strike carefully.

While Zhan was promoting Bitmain’s AI products in Shenzhen, Wu — who had previously renounced his titles in the wake of the IPO failure — returned from the sidelines to “take control of the ship.” And Wu proved to be a brutal captain.

Zhan’s company email was immediately deleted and the co-founder whose technological insights played a central role in the company’s rise to the pinnacle of the crypto world was banned from entering the premises.

Shortly afterward, employees were banned from interacting with Zhan and were told they would face punishment if any communication with him was discovered. David Pring-Mill, a consultant to tech startups, argued that in the cutthroat world of crypto mining, such an aggressive management style is not that surprising:

“Jihan Wu contends that the company hastily and indiscriminately made R&D investments and that a directional change was needed. The power clash here isn't surprising given the stakes and volatility of the crypto market. Mining technologies hinge on decentralization so arguably chaos and disruption are part of the premise.”

According to the Tencent report, both the purging of Zhan from Bitmain, along with Wu’s self-promotion to chairman of the board was done without stakeholder agreement. The matter is not just one of courtesy and transparency toward investors. To do either would have required explicit consent. Bitmain is a company famed for its all-or-nothing approach to business, but after such a tumultuous tale of cloak and dagger politics, the IPO efforts are a serious gamble.

Dovey Wan, founding partner of Primitive Crypto and prominent Twitter commentator, documented the events as they unfolded this week. Wan tweeted that the fight between to two founders would be toxic for stakeholders, “There are hundreds of other ways to make power struggle civil and sophisticated. I still don’t get why this happened”

As the fight played out publicly, alarming commentators across the industry, Wan theorized the ways in which Zhan’s ousting would alienate the company:

“To be completely rational, even giving Jihan credit for his chad gangster coup 1. normal investors will not trust either one of them can manage company. 2. Lawsuit will follow, US IPO plan screwed. 3. Bitmain customer will not trust them. The company is basically a banana.”

Wan suggested that minimal external shareholder influence could have led to the remarkable action from Wu as the top three external shareholders only own around 5% of Bitmain, “No wonder there is little to none proper governance of the company,” Wan finalized.

Unless Bitmain alters its course, it could become the WeWork of the crypto world. WeWork spread across the world, and enjoyed both huge investment and a large customer base. When the company opened up to the public, the company had to face some ugly truths and its vastly overinflated valuation plummeted. With a serious decrease in profits, a hostile corporate culture and some astounding management issues, Bitmain already seems worse off.

Plouton Mining CEO Ramak J. Sedigh told Cointelegraph that, while the companies are likely to have a similar experience with regulators, Bitmain will face greater challenges:

“WeWork had received large multi-billion dollar investments at 10 and 20 billion dollar valuations before attempting an IPO. They were also in a business that people understood. The same can be said of Uber and Lyft. Canaan and Bitmain could have a much harder time, especially if the recent US–China trade war continues. Add to that losses, and the road forward becomes much harder and the climb to success steeper.”

For Pring-Mill, the furious in-fighting at Bitmain is a sad detraction from the company’s true purpose, “From an efficiency standpoint alone, this is all unfortunate because it detracts from the hard work of building and scaling an innovative, meaningful business.”

Third time’s the charm for Canaan?

Canaan is often mentioned in the same sentence as Bitmain, usually as its main competitor. While this may give it some reputational edge, its crypto hardware market share of only 15% is dwarfed by Bitmain’s 75%.

However, Canaan has seemingly been biding its time, waiting in the wings for Bitmain to consume itself. With the recent public in-fighting between Bitmain co-founders, Canaan’s IPO listing seems to have come at a fortuitous time.

Looking to raise $400 million, Canaan filed for an IPO with the SEC on Oct. 28, aiming to be listed on the Nasdaq under the ticker CAN. The firm reportedly filed a $200 million IPO request with regulators in July but the form was not made available to the public until this week. While it would represent a major victory over its competitors if the company receives regulatory approval first, a number of factors also stand in the way of a successful IPO for Canaan.

Although Bitmain may be struggling to shake off the aftermath of its failed IPO, Canaan has the weight of two failed launches permanently around its neck. In 2016, Canaan tried to list in China by buying a Shandong-based electric equipment maker that was listed on the Shenzhen stock exchange.

Then, last year, the company filed to be listed once more, this time on the Hong Kong stock exchange. Both plans, however, fell through after regulators pored over their business model and financial outlook.

But Canaan has trouble beyond its chequered past with regulators. According to an SEC filing, Canaan reported $394 million in revenue in 2018, with a bottom-line net income of $8.3 million. As the company moves toward a public listing, potential investors and regulators alike will be wary of the fact that the firm reported a comprehensive income loss of $45.8 million in the first half of 2019.

What are the odds?

Although the market may be ripe for product launches in the wake of China’s blockchain boost, companies expecting a wave similar to that of the Libra effect may be mistaken. Product launches and IPOs are two very different kettles of fish.

Both companies have faced serious issues in their pasts, all of which could have long-lasting ramifications when it comes to assuring both investors of their potential to generate a return on investment and for their business models to face up under intense regulatory scrutiny.

Plouton Mining’s Sedigh acknowledged that both mining titans will have to make some serious changes to meet industry standards, although he maintains that a successful listing from either company could pave the way for wider adoption:

“It’s also very likely that both Bitmain and Canaan will need to make deep adjustments to their corporate culture. Neither firm is known for its transparency or post-industrial style corporate governance. Regardless, the industry is watching and cheering for them to succeed."

Pring-Mill admitted to Cointelegraph that IPOs are unpredictable, at best. Bearing in mind the scale and importance of these companies in an industry that is renowned for its volatility, Pring-Mill believes the public listings could go either way:

“Today, IPO strategies are faced with an increased measure of unpredictability. So when you combine the two, who knows where that might go? Overall, however, I would say that the traditional methods of disclosure and scrutiny are largely working in the public interest.”