Subversive Bitcoin Acquisition Corp. (Nasdaq:SBAQU) has filed for a $100 million SPAC focused on companies in the cryptocurrency and blockchain technology sector.

It’s been awhile since SPACs have seen any substantial changes to terms, but today, Subversive Bitcoin filed with an interesting twist on the Bitcoin Treasury deals. Rather than use a SPAC to create a Bitcoin or Crypto Treasury company at combination, this deals aims to start as a bitcoin treasury.  However, before we get into the mechanics, let’s review the terms.

Terms Overview

Subversive Bitcoin intends to raise $100 million at IPO with a 1/2 warrant included in its unit. It will have 24 months to combine with a target company and is being underwritten by Jefferies and Canaccord Genuity as joint bookrunners. Galaxy Digital will be co-manager. So far, standard terms for a SPAC in the current environment.

A Split Trust: 90% Cash, 10% Bitcoin

Where it diverges pretty sharply is its trust account.  At IPO closing, it intends to place 90% of the proceeds, or $90 million, into a cash trust account, while 10% will be placed in a separate account that will purchase bitcoin or bitcoin-related products. Furthermore, any interest generated in the cash trust account (the $90 million) can be used to purchase additional bitcoin for the bitcoin account. However, there does not appear to be a limit in this initial version of the S-1 on the amount of interest that can be removed. Theoretically, the sponsor team can remove all the interest accrued (less any interest needed for taxes or dissolution expenses).

However, if a shareholder would like to redeem their shares at a vote (extension or combination vote), they will receive the value per share held in the cash account + the value of the share held in the bitcoin account.

Redemption Value Is No Longer Guaranteed at $10.00

At first blush, it looks like the redemption value per share should be at least $10.00 if you add together both accounts. That is, until you consider that the price of bitcoin can go down, not just up. In fact, as we’ve seen, it can go down a lot and quickly.

Therefore, shareholders can only count on the value held in the cash account, or $9.00 per share, not $10.00. Plus, since the team intends to use any interest accrued in the cash account for additional bitcoin purchases, the redemption value at closing in the cash account will most likely remain at $9.00 per share, plus whatever the value is in the bitcoin account.

But keep in mind, the bitcoin account could be less than $10 million at closing depending on where BTC is trading! That would mean the redemption value would be under $10.00 and investors would receive less back than what they paid for at IPO. This is a significant deviation from the traditional SPAC structure that is the current norm (note: during the 2000’s, SPACs frequently were priced at less than 100% in trust before evolving into the current structure).

Be that as it may, for Jefferies and Canaccord Genuity to launch an offering with a major departure in standard SPAC terms, most likely this deal is already baked. They’re not going to float these terms without soft circling investor interest. At $100 million in size, it’s also a lot easier to round out a book rather than trying to raise something in the $200 to $300 million range, which has become fairly typical as of late.

Questions that still need to be answered

With that being said, there are a number of questions and concerns to consider that are not currently answered in the initial filing. For one, the bitcoin account will be custodied at Efficiency, which is the dba name of Lucky Lucko, which will custody the cash account. Is Efficiency equipped to hold bitcoin safely? Why not something like Coinbase, which most likely has superior security for its crypto holdings?

It’s impossible for us to judge Efficiency’s safeguards and technical capabilities for holding crypto assets, but it would for sure be a question we would ask if we were investors.  Further to that, if Efficiency is hacked, what is the sponsors responsibility? Are they on the hook for trueing up the account? The indemnification is still a little murky.

Additionally, if a shareholder redeems, is the bitcoin portion converted to cash? Or will shareholders receive bitcoin? If that portion of the redemption value is converted to cash, what are the fees for doing so and who pays for it?  Plus, could large redemptions impact execution price?

There’s also the question of how the share will trade since 10% of its value will flucutate and investors need to consider its mNAV (the premium over Bitcoin NAV). Many of the bitcoin treasury companies that have been launched in the last year have seen their mNAV come down significantly, with some even trading below 1.0, with a recent article citing, “Half of pure public Bitcoin treasuries trade at a discount to their net assets”. 

Furthermore, does the sponsor need to wait for interest to accrue before moving it into Bitcoin? Or can they allocate interest as it accrues daily? Because this will affect how quickly the Bitcoin account can grow.

Maybe what’s most interesting is that this deal flirts with Investment Company Act of 1940 rules. Currently, Bitcoin is not considered a “security”, and therefore the bitcoin account is not considered an “investment”.

I mean, it feels like one, but it would require a regulatory change to reclassify Bitcoin, which is probably unlikely. However, the SEC can still scrutinize the use of trust interest to buy speculative assets, which could push the boundaries of “investment company” behavior even if Bitcoin isn’t technically a security.

Either way, Bill Ackman is side-eyeing this SPAC given that his Pershing Square Tontine Holdings was sued over Investment Company Act issues in 2021. Timing is everything and while Gensler’s regime said no to pretty much everything, the current SEC regime is far more friendly to crypto.

SPAC Team

As for this SPAC’s team, it is to be led by Michael Auerbach as CEO and Chairman. Mr. Auerbach is the founder of Subversive Capital with prior leadership across multiple Canadian SPACs and public boards such as Tilray Brands Inc. (NASDAQ: TLRY; TSX: TLRY) and atai Life Sciences N.V. (NASDAQ: ATAI).

Akshai Rajendran will be CFO, and brings the crypto-native trading expertise. He was the former CEO of Pattern Research, a quantitative crypto trading firm, and ex–Head of Options Trading at Elk Capital Markets, LLC, a high-frequency trading shop.

Richard Blackett and Michael Ashe will be directors, with both bringing banking and capital market experience. In Michael Ashe’s case, as senior executive at Galaxy Digital and former head of its investment banking division.

Summary

A draft registration statement was not filed previously, so today’s S-1 is the first registration statement. This is most likely why there are still so many questions that need to be answered in the subsequent amendments.

In the meantime, will SPAC investors indicate for this one? Well, Subversive Bitcoin was clearly never intended for traditional SPAC investors. And certainly not of the arb variety.

As mentioned above, this was most likely pre-baked with crypto investors. This is a novel hybrid that begins with a Bitcoin balance sheet rather than acquiring one, but it remains to be seen if it will be replicated.