FTX’s $250 million credit facility offer – if inked as initially proposed – stood to effectively wipe out all BlockFi shareholders, including Morgan Creek Digital, the firm told its investors.
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.
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.”
“We are still negotiating the terms of the deal and cannot share more information at this time,” a BlockFi spokesperson told CoinDesk on Saturday. “We anticipate sharing more on the terms of the deal with the public at a later date.” FTX did not respond to requests for comment by press time.
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 company files for bankruptcy.
On Friday, the Wall Street Journal reported that FTX was in talks to acquire an equity stake in BlockFi. It is unclear whether new developments since Tuesday have substantially changed negotiations.
When asked by an investor on the call, Yusko said Morgan Creek would be open to an “in-between deal” where FTX (led by billionaire Sam Bankman-Fried) and Morgan Creek both put up a portion of the capital.
“I will definitely try to pursue [a joint deal],” said Yusko. “Not that I have SBF on speed-dial, but I could probably get that call.”
Yusko said that he spoke with one potential lead investor that could write a $100 million check, as well as two other investors who “expressed interest” and could write checks up to $50 million.
Morgan Creek Digital, co-founded by Anthony “Pomp” Pompliano, is one of BlockFi’s largest investors. The firm has participated in BlockFi’s Series A through D fundraising rounds across three funds and a special purpose vehicle (SPV), a type of investment structure that allows an investor to invest in a single company.
Yusko cautioned that while Morgan Creek was doing all it could to salvage its investment in BlockFi, success was far from assured.
“It’s not over, but it is definitely looking dark,” he said.