FinTech firm Longfin Corp. has just suffered a severe setback. On April 2, 2018, the Reg A+ company released its annual report confirming that the enforcement division of the U.S. Securities and Exchange Commission (SEC) is investigating its trading practices. As you can probably guess, a backlash was inevitable.
Picking up the Pieces
Shortly after the news broke, the once-surging Longfin stock prices took a nosedive, plummeting nearly 31 percent to $9.89 a share. With this new low, the troubled firm has seen an 82.43 percent drop in share prices since the beginning of 2018.
(Source: Wall Street Journal)
For the uninitiated, Longfin went public in late 2017 under Reg A+, which is basically a scaled down variant of the traditional initial public offering (IPO).
NASDAQ-listed Longfin’s market cap saw a steep surge (by more than 2,000 percent at a point in time) in just two days following its acquisition of Ziddu.com, a blockchain-powered global Micro-lending Solutions Provider.
The deal between the two companies gave Longfin the access to Ziddu’s resources and expertise in smart contracts for SMEs, manufacturers, importers, and exporters across the world. Ziddu described its homegrown digital coins as loosely pegged to bitcoin and ether.
However, later it was alleged that the Ziddu coin was only a basic Ethereum token and wallet that Longfin rebranded in December 2017 to propagate the microlending story.
With that taken into account, Ziddu’s business model didn’t make much sense as ethereum is too volatile a currency to be used for loans.
Here’s a quick overview of how the chain of events transpired:
- New York City-based FinTech startup Longfin begins trading on NASDAQ as Reg A+ IPO on December 13, 2017.
- Shares valued at $5 per share as of December 13, 2017.
- No significant changes in share prices as of December 15, 2017.
- Longfin announces the acquisition of Ziddu on December 15, 2017
- Within 24 hours of the announcement, Longfin share prices skyrocket by more than 200 percent.
- There is another 200+ percent surge in the next 24 hours.
With an unprecedented surge of that magnitude, Longfin starts trading in nearly $44 per share, and the company’s market cap increases 10x to roughly $3.35 billion.
It is hard to pinpoint any particular reason as to why Longfin had a change of fortune overnight. A combination of luck and an unfounded hype is probably the closest you could come to explaining the phenomenon.
Even Venkat Meenavalli, the Chief Executive of Longfin, found the enormous spike in stock value a bit tough to swallow.
“This market cap is not justified. I valued my IPO pricing at $5. We are a profitable company [We] have nothing to do with this euphoric mania,” Meenavalli said in a conversation with the CNBC.
SEC Steps in
The Division of Enforcement of the SEC notified Longfin about the then-forthcoming investigation into possible anomalies within the company’s trading history.
Given the investigation, Longfin was asked to submit all relevant documents regarding its IPO and the acquisition of Ziddu.
Longfin complied with the request by way of a 10-k filing that promised full cooperation with the SEC. It reads:
“We are in the process of responding to this document request and will cooperate with the SEC in connection with its investigation. While the SEC is trying to determine whether there have been any violations of the federal securities laws, the investigation does not mean that the SEC has concluded that anyone has violated the law.”
It is worth noting that earlier in 2018, the SEC had issued a warning stating that it would take stringent action against businesses that exploited the widespread enthusiasm surrounding blockchain technology and crypto market to manipulate stock prices.