SPAC 93% Redemption Rate Alert! Tether and SoftBank bet on Twenty One as a focus of attention.

As Bitcoin plummets 30% from its October peak, special purpose acquisition companies (SPACs) face challenges replicating MicroStrategy's success. The performance of Bitcoin company Twenty One Capital Inc., backed by SoftBank Group and Tether, after its merger with Cantor Equity Partners Inc., will be closely followed after the investor vote on December 3.

Analysis of Tether and SoftBank's $165 million PIPE Investment

(Source: X)

The transaction between Cantor and Twenty One will make Tether and SoftBank the largest shareholders, raising $165 million through a private investment in public equity (PIPE). The acquisition price of PIPE is $21 per share, completed in June, which is nearly a 50% premium over Tuesday's closing price. This huge premium difference reveals the drastic changes the crypto market has undergone in just a few months.

PIPE (Private Investment in Public Equity) is a common financing method in SPAC transactions, allowing institutional investors to purchase shares at negotiated prices before the merger is completed. Tether and SoftBank chose to participate in PIPE in June at a price of $21 per share, when the price of Bitcoin was close to its historical peak and market sentiment was extremely optimistic. However, as Bitcoin fell 30% from its peak in October, the stock price of Twenty One came under pressure as well, with the current trading price far below the cost for PIPE investors.

Tether, as the world's largest stablecoin issuer, has strategic significance in its investment in Twenty One. Tether is not only a leader in the stablecoin market but also holds a substantial amount of gold reserves and actively lays out crypto infrastructure globally. By investing in Twenty One, Tether can secure a foothold in Bitcoin fund management while providing more application scenarios for its stablecoin business.

The participation of SoftBank Group is also noteworthy. This Japanese tech investment giant is known for its aggressive investments in companies like WeWork and Uber. SoftBank's choice to bet on Twenty One shows its long-term optimism about the Bitcoin fund management model. However, SoftBank has also faced criticism for the high valuations of projects in its portfolio, and the performance of Twenty One will be an important case to test SoftBank's crypto investment strategy.

Details of Tether and SoftBank Investments

PIPE Scale: 165 million USD

Investment Price: $21 per share (completed in June)

Current Premium: Nearly 50% premium relative to Tuesday's closing price

Shareholder Status: Become the largest shareholder of Twenty One

Lock-up period: You must wait until registration by US regulatory authorities before trading freely.

This type of high premium investment faces significant unrealized loss risks in the current market environment. If the stock price of Twenty One continues to be sluggish, Tether and SoftBank may need to wait a long time to recover their investment. This also explains why the investor vote on December 3rd is so critical—if the merger fails to get approved, the entire deal may face restructuring or cancellation.

93% redemption rate and early investor arbitrage wave

The structure of a SPAC includes redemption provisions that allow investors to redeem their shares at a price of $10 per share plus any accrued interest. Data from SPAC Research analyzed by Bloomberg shows that, over the past two years, an average of about 93% of shares were redeemed after SPAC transactions were completed. This extremely high redemption rate reveals a fundamental problem in the SPAC market: most investors are not optimistic about the long-term prospects of the merged company, but rather view SPACs as a short-term arbitrage tool.

Julian Klymochko, CEO of Accelerate Financial Technologies, stated that the business models of these companies are built on marketing to retail investors. Only if retail investors are willing to pay a price for the company's stock that exceeds the value of its cryptocurrency holdings can the company sell shares (issue new shares to buy coins). Klymochko revealed that he sold shares of Lutnick SPA, gaining a substantial windfall, and has been buying shares of Columbus Circle to quickly cash in on profits.

The logic of this arbitrage strategy is relatively simple: SPAC investors, after the merger announcement, can choose to redeem their shares for $10 per share plus interest (usually annualized at 5-6%), or sell their shares in the secondary market. When the stock price is above the redemption price, investors will choose to sell; when the stock price is below the redemption price, investors will choose to redeem. This mechanism provides savvy arbitrageurs with nearly risk-free profit opportunities.

However, for SPAC sponsors and the target merger companies, a redemption rate of 93% is disastrous. This means that after the merger is completed, the company can only retain 7% of the initially raised funds, while most of the funds are redeemed and taken away by investors. This loss of capital makes it difficult for the post-merger company to execute its established business plan, often requiring additional financing to maintain operations.

ProCap and Pompliano's Founder Share Dispute

The merger deal between ProCap, a Bitcoin asset management company founded by the well-known figure Anthony Pompliano, who has long been active in the cryptocurrency space, and Columbus Circle Capital Corp. I, will also attract attention for its redemption rate. In the ProCap deal, the SPAC's sponsors will receive 9 million shares for their role in the transaction, which is a common practice for SPACs, known as sponsor shares or founder shares, allowing supporters to acquire shares at a very low price.

An entity controlled by Pompliano has invested $8.5 million and will hold more than 10 million shares after the transaction is completed. Based on Tuesday's closing price, these shares are valued at over $100 million. The entity controlled by Pompliano will continue to provide certain consulting, marketing, and advertising services for the merged company. This arrangement is very common in SPAC transactions, but it has also raised questions about conflicts of interest.

The shares of sponsors have become an important point of focus during the recent collapse of the SPAC industry. Critics argue that SPAC sponsors acquire large amounts of shares at a very low cost (usually a few cents per share), while retail investors have to purchase them at prices of $10 or more, creating a structure that inherently favors the sponsors over ordinary investors. Pompliano invested $8.5 million but obtained shares worth over $100 million, reflecting this structural issue with a more than 10-fold paper return.

More controversially, the entity controlled by Pompliano will also provide consulting services for the merged company. This means that in addition to the appreciation of shares, Pompliano will also receive additional service fee income. This multiple interest relationship may affect its ability to provide objective advice as a company consultant.

Bitcoin big dump 30% impact on SPA valuation

Bitcoin has fallen by 30% from its peak in October, which is a fatal blow to all SPAC mergers that rely on Bitcoin prices. The valuation logic of these digital asset management companies is typically based on the amount of Bitcoin they hold multiplied by the market price, plus a certain expected management fee income. When the price of Bitcoin drops by 30%, the intrinsic value of these companies also shrinks by 30%.

However, the valuation of SPAC mergers is often determined months or even a year in advance, when the price of Bitcoin may be at a high. By the time the merger is finally completed, the market environment may have completely changed. This time lag creates significant valuation mismatches, causing investors to be unwilling to pay the premium that was negotiated initially.

Currently, there are 9 SPAC companies waiting to merge with digital asset management companies. The stock prices of each company have fallen from the initial frenzy. This widespread fall in stock prices indicates that investor confidence in the entire SPAC + digital asset management model is wavering. Wall Street observers question whether investors will continue to hold and pay the premium that was popular when the market environment was vastly different.

Vote on December 3 to Decide Future Destiny

Both companies will hold a vote for investors on December 3 to determine their future direction. This vote will not only decide whether the merger can be completed, but also reveal the market's true attitude towards the SPA + digital asset management model. If the vote passes and the redemption rate is lower than expected, it will instill confidence in other SPACs waiting for a merger. Conversely, if there is a high redemption rate or the vote does not pass, it may trigger a systemic sell-off in the entire SPAC digital asset sector.

Given that the sponsor's shares and PIPE investors need time to register their shares with US regulatory agencies, early investors must wait for the current cryptocurrency downturn to subside in order to maximize their returns. This lock-up period provides a certain buffer to the market, but it also means that institutional investors such as Tether and SoftBank need to endure longer periods of paper losses.