Circle Internet Financial, a crypto company backed by Coinbase Global, is attempting to go public with an offering that could be worth billions. However, the Securities and Exchange Commission (SEC) has expressed concerns about Circle’s core product, a stablecoin, as well as other issues, according to documents obtained by Barron’s.
Circle issues USDC, a stablecoin worth $32 billion, and Coinbase owns at least a 3.5% stake in Circle, valued at $51 million last year. Coinbase also shares in the interest income generated by USDC’s reserves. CFO Alesia Haas recently expressed strong support for USDC, stating, “I should say why I love USDC.”
Circle first attempted to go public in 2021 via a special-purpose acquisition company (SPAC), but the attempt failed. The company is now pursuing a traditional IPO.
Documents obtained by Barron’s from the SEC, through a public records request, include correspondence between the SEC’s Division of Corporation Finance and Circle. This exchange lasted nearly a year, an unusually long period, during which the SEC requested Circle to add disclosures about the risks of its token being classified as a security. Circle complied with these requests.
The SEC also raised concerns about whether Circle should be considered an “investment company” and undergo a different registration process. Investment companies, such as mutual funds, are subject to closer SEC oversight, regular reporting, and business activity restrictions that operating companies don’t face. If USDC were deemed a security, Circle would need to register the tokens, limiting certain business transactions.
“If these things are securities, it becomes more expensive for Circle to operate, if they even can operate,” said Todd Phillips, a law professor at Georgia State University.
A Coinbase spokesperson stated, “USDC is not a security.” Circle declined to comment, and the SEC did not respond to a request for comment.
Based in Boston, Circle operates the second-largest stablecoin, typically pegged to the dollar. USDC’s market value of $32 billion has significantly decreased from its peak of $55 billion in 2022 and has fallen behind USDT, the stablecoin issued by Tether, which dominates the market at $112 billion.
Stablecoins remain highly lucrative in the crypto space. Issuers convert cash into stablecoins and invest the reserves backing the token. Circle holds its reserves in banks and a fund managed by BlackRock, which invests in Treasuries and related securities. The income from these reserves has proven lucrative, especially with rising interest rates. For instance, Tether reported $4.5 billion in earnings for the first quarter, while Coinbase earned $198.9 million from stablecoin revenue during the same period.
Despite its profitability, the stablecoin business has been controversial among regulators. SEC Chair Gary Gensler has compared some stablecoins to money-market funds, suggesting they should register with the agency, a move that could increase costs and disrupt their business model. Conversely, Commodity Futures Trading Commission Chairman Rostin Behnam considers stablecoins as commodities under his agency’s jurisdiction.
Executives at Circle, Tether, and other crypto firms have long argued that their products aren’t securities and have lobbied Congress to clarify their regulatory status.
Amid this regulatory uncertainty, Circle attempted to go public in July 2021 through a merger with Concord Acquisition Corp., a SPAC. The deal, initially valued at $9 billion, was renegotiated in February 2022, but ultimately fell through in December 2022. Circle is now making another attempt, having filed confidential paperwork for an IPO in January.
The documents obtained by Barron’s shed light on the SEC’s concerns as Circle seeks to go public again. Despite nearly a year of back-and-forth, the SEC continued to have numerous comments, questions, and revision requests. Securities attorney Xavier Kowalski, who is not involved in the process, described the situation as “pretty terrible” given the number of unresolved issues after eight months.
From the outset, the SEC focused on Circle’s regulatory status and whether its products are securities that should be registered with the agency. In December 2021, the SEC asked Circle to provide an analysis supporting its conclusion that it wasn’t an investment company. The SEC also requested additional disclosures about the potential consequences if USDC or other products were deemed securities under U.S. law and asked Circle to clarify that its judgment isn’t a legal standard or binding determination for any regulatory body.
Throughout 2022, the SEC continued to ask for more warnings about the risks if USDC were classified as a security. Kowalski noted that these disclosures are significant as the SEC aims to avoid future complications during enforcement actions.
The consequences of USDC being deemed a security are unclear but could include fines, penalties, and the requirement for Circle to register as a broker-dealer. Customers might also have the option to rescind previous USDC purchases.
By October 2022, the SEC’s concerns had shifted to more technical issues, such as details about Circle’s euro-backed stablecoin and the valuation of its derivatives. Kowalski indicated that Circle appeared to have addressed the major concerns that could have blocked its public company aspirations.
There is no fixed deadline for the SEC to approve Circle’s IPO filings. However, the company could benefit from going public in the current market, as crypto prices have surged, with Bitcoin rising nearly 50% to over $65,000 and the broader crypto market exceeding $2.5 trillion in value.
Part of this surge is attributed to the SEC allowing exchange-traded funds holding Bitcoin and Ether to trade. Crypto proponents are hopeful that regulatory attitudes are becoming more favorable.
Whether this optimistic outlook will extend to Circle’s proposed IPO remains uncertain.
