KEY POINTS
  • Coinbase is going public through a direct listing, but it's not giving investors many indications as to how private investors value the stock.
  • According to its prospectus, only 2.1 million shares were sold all last year, way below the trading in companies like Palantir, Spotify and Roblox ahead of their direct listings.
  • "The lack of trading activity does create a situation where the company and its advisors have significantly less ability to set a market-driven reference price," said Kelly Rodriques CEO of pre-IPO marketplace Forge.
Coinbase CEO Brian Armstrong

Coinbase may be targeting an astronomical valuation when it goes public in the coming weeks, but it's yet to give investors an indication of what kind of prices people are willing to pay in the private market.

Instead of going public through an IPO, Coinbase is following companies like Spotify, Slack and Palantir by pursuing a direct listing, allowing existing investors to sell their shares on the open market at the time of the debut.

But Coinbase is very different in one critical way. All of those companies were able to show investors a history of substantial private trading in their stock to provide a sense of demand. That's an important data point for price discovery, since investment banks in a direct listing aren't out shopping the stock to build a book of bids from institutions.

Palantir, for example, said that 50 million shares were sold in the first eight months of 2020 ahead of the data analytics company's direct listing in September. Audio streaming company Spotify said close to 13 million shares changed hands in 2017 and nearly 8 million in the first couple months of 2018 just before its listing. Gaming platform Roblox, which is scheduled to list next month, said 31 million shares were transacted last year.

In Coinbase's prospectus Thursday, the cryptocurrency exchange disclosed only two transactions totaling 2.08 million shares in all of 2020, with early backer Union Square Ventures selling half that amount to Paradigm Fund and the other half to Andreessen Horowitz. The price was $28.83 a share, valuing the company at between $7 billion and $8 billion, depending on the share count.

'Limits their insight'

Kelly Rodriques, CEO of Forge, a marketplace for pre-IPO shares, said Coinbase has been very restrictive of employee share sales in the past and just recently started enabling secondary sales.

"The lack of trading activity does create a situation where the company and its advisors have significantly less ability to set a market-driven reference price," Rodriques said in an email. "It also limits their insight into what level of interest there is by current shareholders to liquidate positions and what the demand will be at the time of the opening." 

According to a report from Axios last week, Coinbase has been rapidly playing catch-up with secondary trading. The company is offering up to 1.8 million shares in "weekly batches" on the Nasdaq Private Market, and the most recent batch of 127,000 shares in mid-February went for $373 a share, Axios said.

That price values the company at just over $100 billion, representing a thirteenfold increase from the most recent Union Square sales.

A Coinbase spokesperson declined to comment as did a representative from Nasdaq.

Enthusiasm around Coinbase is surging alongside the value of cryptocurrencies because the company makes money when investors trade and store the assets. Bitcoin is up about 600% since the beginning of 2020, while ethereum is up more than 1,000%.

Coinbase still has time to update its prospectus with more recent trades and is likely to provide investors with more clarity on where supply meets current demand. But Rodriques said one reason there have been so few transactions is that nobody wants to sell.

"This past year, as interest in the crypto markets increased, so did demand for Coinbase shares," he said. "However, supply was limited as sellers were unwilling to liquidate their positions in large quantities given strong price appreciation almost on a weekly basis."

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