Seizing Opportunities in the Crypto Winter: Strategies for Distressed Crypto Firms and Savvy Buyers

Seizing Opportunities in the Crypto Winter

The recent arrival of the crypto winter has prompted a wave of consolidation within the market, revealing unique prospects for matchmaking potential buyers with distressed sellers. Amid this shifting landscape, players armed with substantial cash reserves have expressed a keen interest in leveraging their resources to assist struggling crypto firms weather the current market challenges. On the other end of the spectrum, companies such as Voyager Digital and its subsidiaries have pursued bankruptcy protection, hoping to either secure a buyer or devise a restructuring plan. Meanwhile, other distressed crypto firms are exploring various strategies to navigate these uncertain times.

The array of potential transactions within this context seems limitless. Buyers may be inclined to acquire distressed targets either by purchasing all of the equity through a stock sale or merger or by acquiring a limited pool of assets. Additionally, distressed sellers may consider conducting carve-outs or spin-offs of non-strategic assets, or potential buyers might engage in “acqui-hire” transactions to acquire the skilled workforce of a distressed seller. Furthermore, transactions might be driven by a desire to acquire a distressed seller’s technology through licensing arrangements or loans to own strategies. Notably, well-funded market participants have already begun to explore these tactics, demonstrating the breadth of possibilities within the market.

However, each of these potential transactions carries its own set of benefits and risks. When dealing with distressed sellers whose valuations have significantly declined, the issue of fraudulent transfer claims becomes a pressing concern, particularly when transactions occur outside formal sale processes like bankruptcy or foreclosure. Determining whether an opportunistic buyer has paid fair or reasonably equivalent value for a distressed target or its assets can be challenging, potentially leaving creditors with less than what they are owed. In this intricate landscape, distressed sales must be conducted swiftly and strategically to optimize value for sellers and provide protection for buyers.

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Two primary avenues for distressed sales have emerged, each with its own distinct characteristics and implications.

  1. In-court Bankruptcy Sale: Under Section 363 of the United States Bankruptcy Code, distressed sellers like Voyager have the option to sell their assets free and clear of claims and interests. This process involves a court-supervised auction and sale, ensuring that the buyer is protected by a court order authorizing the sale and shielding them from potential fraudulent transfer attacks. Importantly, secured creditors have the right to credit bid their secured claims, enhancing their position in the sale process.
  2. Out-of-court UCC Foreclosure Sale: Alternatively, distressed sellers with outstanding loans secured by their business assets may opt for an expedited foreclosure sale facilitated by their secured lender(s). While this process is faster and less costly than a bankruptcy sale, it lacks the same level of protection against fraudulent transfer or successor liability claims. Buyers must adhere to well-recognized procedures and practices to safeguard the sale from potential legal challenges.

Additionally, buyers seeking an advantageous position may strategically acquire existing secured loan notes from lenders, allowing them to credit bid outstanding loans in both bankruptcy and UCC sales. Confirming the perfection of liens in the assets is crucial before finalizing the purchase of the secured loan.

In the absence of a formal sale process, buyers should consider obtaining a fairness opinion from a reputable valuation firm to mitigate the risk of fraudulent transfer claims. Moreover, it is essential for all parties involved to thoroughly understand the nature of the assets being purchased, especially in the case of crypto-firms that function as brokerages or custodians.

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As the crypto market continues to navigate these challenging times, both distressed firms and capital-endowed market players have the opportunity to maximize value through carefully executed strategies for the disposition of distressed assets. The complexities of this landscape demand a combination of caution, agility, and strategic thinking to ensure a successful transaction for all parties involved.

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