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A leaked investor call from Tuesday discloses that cryptocurrency investment firm Morgan Creek Digital is seeking $250 million from investors to acquire a controlling interest in cryptocurrency lender BlockFi.
In response to Tuesday morning's statement by crypto exchange FTX that it would give a $250 million credit line to BlockFi, Morgan Creek devised a strategy to build an equity offer hastily.
The company Morgan Creek Digital refused to respond. Multiple venture capital funds are considering methods to give equity funding to BlockFi, according to a source familiar with the matter, as the lender fights to stay viable.
At risk is the ability of current BlockFi shareholders, notably long-term investor Morgan Creek, to reclaim their money.
In the leaked conversation, Morgan Creek Digital managing partner Mark Yusko stated, “I’ve been making calls all day.”
According to Yusko, the credit line proposal from FTX featured a caveat for BlockFi’s current shareholders: it provided FTX the chance to acquire BlockFi “at basically no cost.” If FTX were to exercise this option, it would essentially eliminate all of BlockFi’s existing equity stockholders, including management and workers with stock options, as well as all equity investors from earlier venture rounds.
Yusko stated in the leaked conversation, however, that BlockFi founders Zac Prince and Flori Marquez had a solid rationale for accepting the terms provisionally: BlockFi received other proposals for emergency finance, but only FTX would not subordinate customer assets to the rescuer.
If BlockFi had not partnered with FTX, its depositors would have had to wait behind the new lender to be refunded. In addition, there were no equity funding options available to BlockFi at that time. (Yusko did not name the other companies who presented bailout packages for BlockFi.)
The BlockFi CEO, Prince, announced through Twitter on June 21 that the firm has signed an initial term sheet with FTX. Yusko informed investors on that day’s leaked call that FTX and BlockFi were “about three days away” from a definitive deal.
Saturday, a BlockFi spokeswoman told CoinDesk, “We are still negotiating the terms of the deal and cannot share more information at this time. We anticipate sharing more on the terms of the deal with the public at a later date.” By press time, FTX had not responded to demands for comment.
According to Yusko on the leaked call, if FTX exercised its option after extending the credit line, only investors in the most senior tranche of the company’s most recent fundraising would get anything back, and even that would be cents on the dollar.
Morgan Creek, which participated in several financing rounds for BlockFi, will be among the recipients.
“The only alternative is to raise an equivalent amount in equity, and that’s what we’re working on,” Yusko said to investors on the call. “I would say it’s a 10% possibility but not zero.” A tape of the conversation, which CoinDesk examined, provides a unique glimpse into the behind-closed-doors discussions to save BlockFi, one of the crypto industry’s top lenders, amid a catastrophe in the digital asset and more extensive financial markets. Yusko compares FTX’s rescue package to J. Pierpont Morgan’s bailout of the Knickerbocker Trust in 1907. This demonstrates how the current turmoil mimics previous financial catastrophes.
The Wall Street giant Goldman Sachs has been attempting to gather a group of investors to acquire the assets of another ailing cryptocurrency lender, Celsius Network, at deep discounts if the company declares bankruptcy.
The Wall Street Journal reported Friday that FTX was discussing purchasing a stake in BlockFi. Uncertain whether fresh events since Tuesday have significantly altered conversations.
In response to a question from an investor on the call, Yusko stated that Morgan Creek would be open to a “middle-ground agreement” in which FTX (headed by billionaire Sam Bankman-Fried) and Morgan Creek both contributed funds.
Yusko stated, “I will surely attempt to explore [a joint venture].” Not that I have SBF programmed into my speed-dial, but I could likely get that call.
Yusko reported speaking with one possible lead investor who could write a $100 million check and two other investors who “expressed interest” and could write reviews of up to $50 million each.
Anthony “Pomp” Pompliano’s Morgan Creek Digital is one of BlockFi’s leading investors. The firm participated in BlockFi’s Series A through Series D fundraising rounds across three funds and a particular purpose vehicle (SPV), a form of investment structure that enables investors to invest in a single company.
Yusko warned that despite Morgan Creek’s best efforts to rescue its investment in BlockFi, success was not inevitable.
“It’s not over, but it is looking dark,” he stated.