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Morgan Creek Is Trying to Counter FTX’s BlockFi Bailout, Leaked Call Shows

Morgan Creek Is Trying to Counter FTX’s BlockFi Bailout

The firm told its investors that if signed as initially proposed, FTX’s $250 million line of credit offering would effectively wipe out all of BlockFi’s shareholders, including Morgan Creek Digital.

Cryptocurrency investment firm Morgan Creek is attempting to raise $250 million from investors to buy a majority stake in digital crypto lender BlockFi, a leaked investor call Tuesday reveals.

The plan was to quickly put together an equity offering from Morgan Creek in response to cryptocurrency exchange FTX’s announcement Tuesday morning that it would extend a $250 million line of credit to BlockFi.

Morgan Creek Digital declined to comment. A person with knowledge of the effort said several venture capital funds are exploring ways to provide equity financing to BlockFi as the lender struggles to keep afloat.

At stake is the ability to exist BlockFi shareholders, including longtime backer Morgan Creek, to recoup their investments.

“I’ve been on calls all day,” Morgan Creek Digital managing partner Mark Yusko said in the leaked call.
According to Yusko, FTX’s line of credit offer had a problem for existing BlockFi shareholders: it gave FTX the option to buy BlockFi “at essentially zero cost”. If FTX exercises such an option, it would effectively liquidate all existing equity shareholders of BlockFi, including management and employees with stock options, as well as all equity investors in the company’s previous venture rounds.

However, Yusko said in the leaked call that BlockFi founders Zack Prince and Flory Marquez had a valid reason for agreeing to the terms before: out of the many emergency funding offers BlockFi received, there was only one from FTX that would allow customer assets to be sold. Subordinate will not. To the savior

In other words, unless BlockFi went with FTX, its depositors would have to wait in line behind a new lender to receive a refund. Furthermore, BlockFi did not have any equity financing options at the time. (Yusko has not identified any other company that proposed rescue packages for BlockFi.)

BlockFi CEO Prince tweeted on June 21 that the company has signed a preliminary term sheet with FTX. Yusko told investors on the leaked call that day that FTX and BlockFi were “three days away from signing a definitive agreement.”

“We are still negotiating the terms of the agreement and cannot share any further details at this time,” a BlockFi spokesperson told CoinDesk on Saturday. “We look forward to sharing more about the terms of the agreement with the public later.” As of press time, FTX did not respond to requests for comment.

According to Yusko in the leaked call, if FTX exercises its option after extending the credit line, only the most senior tranche of the company’s latest growth will get investors back, even dollars. But the amount of money will be there.
Morgan Creek, which participated in several funding rounds for BlockFi, will be one of those with the bag.

“The only option is to raise a similar amount in capital, and we are working on that,” Yusko told investors on the call. “I’d say it’s a 10% chance, but not zero.”

A recording of the call, reviewed by CoinDesk, provides a rare window into closed-door talks to save BlockFi, one of the crypto industry’s largest lenders, amid a slump in digital assets and broader financial markets. , It also shows how the current turmoil echoes past financial crises, with Yusko comparing the FTX bailout package to J. Pierpont Morgan’s bailout of the Knickerbocker Trust in 1907.

Wall Street firm Goldman Sachs is trying to organize a group of investors to grab assets from another troubled crypto lender, Celsius Network if the company files for bankruptcy.

The Wall Street Journal reported Friday that FTX is in talks to acquire an equity stake in BlockFi. It is not clear whether new developments have substantially changed the talks since Tuesday.

Asked by an investor on the call, Yusko said Morgan Creek would be open to an “intermediate deal” in which FTX (run by billionaire Sam Bankman-Fried) and Morgan Creek would hold a portion of the capital.
“I will definitely try to find [a joint agreement],” Yusko said. “Not that I have SBF on speed dial, but I can probably get that call.”

Yusko said he spoke with a potential lead investor who could write a check for $100 million, as well as two other investors who “express interest” and can write checks for up to $50 million.

Morgan Creek Digital, co-founded by Anthony “Pomp” Pompliano, is one of the largest BlockFi investors. The firm has participated in BlockFi’s Series A through D fundraising rounds consisting of three funds and a special purpose vehicle (SPV), a type of investment structure that allows an investor to invest in a company. .

Yusko cautioned that while Morgan Creek was doing its best to protect its investment in BlockFi, success was not assured.

“It’s not over, but it definitely looks dark,” he said.

 

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