CoinSmart Determined to See Through Acquisition by Coinsquare

On Tuesday, cryptocurrency trading platform CoinSmart announced that it had rejected the notice from its Toronto-based rival Coinsquare to back out of the pair's acquisition deal. For those unversed, CoinSmart and Coinsquare are among Canada's ten largest crypto exchanges.

The crypto trading startup believes that the Share Purchase Agreement still binds Coinsquare, and it intends to hold Coinsquare to its obligations under that agreement, as per the press release this week. CoinSmart rejected Coinsquare's notice of termination of the acquisition deal “on the basis that it is invalid and without merit.”

Coinsquare reached a deal to buy CoinSmart last fall and originally proposed to buy the platform for around $29 million in cash and shares. Coinsquare had surprised CoinSmart by pulling out of a takeover agreement that would have placed Canada's two biggest crypto companies under the same Canadian roof but then decided that the transaction was not worth the steep price tag to buy out CoinSmart.

CoinSmart is a leading Canadian cryptocurrency trading platform, aiming to give customers a user-friendly approach to buying and selling digital assets such as Bitcoin and Ethereum. The trading platform is known for its simple trading interface and is fully licensed in each jurisdiction in which it operates.

It is one of the first Financial Transactions and Reports Analysis Centre of Canada-regulated exchanges. CoinSmart is also among the handful of crypto trading platforms in Canada that are registered with the Ontario Securities Commission (OSC) as both a securities dealer and a marketplace.

In its rejection announcement, CoinSmart also shared a corporate update revealing that as of January 16, 2023, it held proprietary cash and crypto assets worth about $10 million and had no debt.

Consolidation Amidst Crypto Collapse, Acquisitions Begin

Coinsquare first struck the deal to acquire CoinSmart around four months ago amidst the cryptocurrency market's collapse. At this time, consolidation has been happening within Canada's crypto market. Both Coinsquare and CoinSmart rival WonderFi, a Kevin O'Leary-backed crypto company, made several acquisitions around this time.

On September 22, 2022, Coinsquare announced that Coinsquare has entered into a definitive agreement with CoinSmart Financial Inc. for acquiring all issued and outstanding shares of its wholly-owned operating subsidiary, Simply Digital Technologies Inc. (Simply Digital), which owns and operates CoinSmart Trading Platform.

The transaction involved Coinsquare paying CoinSmart $3 million in cash and issuing 5.2 million Coinsquare shares to CoinSmart. On the completion of the acquisition, CoinSmart will hold approximately 12% of the issued and outstanding Coinsquare shares. Coinsquare's largest shareholder, Mogo, trades on the NASDAQ and the TSX, disclosed in its financials that it valued Coinsquare's shares at approximately $5.02 as of June 30, 2022.

As part of the deal, CoinSmart co-founders Justin Hartzman, Jeremy Koven, and Michael Koral, among other employees, will also be joining Coinsquare.

The two companies claimed a combined crypto volume of over $10 billion since January 2018 and over $350 million in assets under custody with a combined user base in excess of one million.

With these numbers, the acquisition was expected to make Coinsquare one of the largest crypto exchanges in Canada while expanding its operations and commercial capabilities.

While Dealing with Layoffs & Breaches

Founded in 2014, Coinsquare is a privately held corporation incorporated under Canadian law that allows users to buy, sell, and trade cryptocurrencies through its QuickTrade mobile app with no commissions. Last October, Coinsquare became the first cryptocurrency platform registered with the Investment Industry Regulatory Organization of Canada (IIROC).

Coinsquare's acquisition plans came following the announcement in late July 2022 that the company is laying off about 24% of its employees. The layoff reduced its headcount from 125 employees to approximately 95 workers. The company also introduced an undisclosed pay cut for its executives.

Besides tougher market conditions, the layoff decision was made in order to have a stronger focus on becoming a regulated crypto exchange after reaching a settlement with the OSC in 2020 in relation to market manipulation, said Coinsquare CEO Martin Piszel.

A month after the deal's announcement, Coinsquare reported a breach but said that customer assets are “secure in cold storage and are not at risk.” The breach exposed customer details, including their names, dates of birth, email addresses, residential addresses, phone numbers, device IDs, public wallet addresses, transaction history, and account balances.

Coinsquare Backs Out, Says it not Worth the High Cost

Less than four months after the deal, Coinsquare wanted to back out of that deal which CoinSmart said came as a surprise, according to a January 9 press release from CoinSmart.

Justin Hartzman, co-founder and CEO of CoinSmart, said they were surprised when he and the board of directors received a notice of termination from Coinsquare as they had been given assurances that the necessary final regulatory approvals required for the deal would be obtained this week. Hartzman added that they were in the process of evaluating the validity and effectiveness of the notice.

Hartzman shared that CoinSmart is now “considering all options as it has been in a position to complete the transaction for many weeks already.” He further claimed that “Coinsquare has not complied with their obligations under their notice of purported termination.”

Meanwhile, Coinsquare argued that it “exercised its rights to terminate the agreement with CoinSmart in accordance with its terms.” Coinsquare COO Eric Richmond told a media publication that after standard due diligence, the company thought that acquiring a public company at such a high cost wasn't worth it.

In Nov. 2021, CoinSmart made its public market debut on the NEO Exchange under the ticker SMRT to gain greater visibility and investor awareness.

Coinsquare Shifts Merger Talk to Another Rival, WonderFi

A couple of days later came the reports that Coinsquare Ltd. and WonderFi Technologies (WNDR) were in advanced talks to merge and become Canada's largest crypto exchange.

Following the report from Bloomberg, which cited people familiar with the matter, shares of WonderFi were halted on the Toronto Stock Exchange. WonderFi is one of Canada's only publicly traded exchanges, and its shares rose 29% to 31 cents after all the media speculation about the potential merger.

The potential Coinsquare-WonderFi merger terms were not known, but one of Bloomberg's sources noted it could potentially involve Coinsquare shareholders taking a majority stake in the combined company.

In a public statement following the news — which was “issued at the request” of the IIROC in regard to recent market activity,” — WonderFi neither confirmed nor denied the Coinsquare crypto merger report, saying it has held preliminary discussions with companies about potential acquisitions.

WonderFi stated that it has been in talks with various third parties regarding acquisitions and that WonderFi itself is also a potential candidate to be acquired by another company. The company said this aligns with its past practices and “general acquisition strategy.”

However, WonderFi cautioned that these discussions are still in their preliminary stages and that there is no guarantee that any agreement will be reached. The terms of any potential transaction have not been agreed upon, and it is not certain that a transaction will take place, added the crypto company.

Intend to Vigorously Contest, Carry out the Deal or Monetary damages

WonderFi Technologies Inc said in November that it had approximately 650,000 users on its exchange, $258 million of assets under management, and $45 million in revenues from its subsidiaries BitBuy and Coinberry; Coinsquare Ltd did not disclose assets under management or revenues but said its platform had approximately 500,000 users.

A source directly aware of discussions with WonderFi Technologies Inc believes Coinsquare's regulatory status with IIROC will help it play a leadership role in integrating Canada's other troubled crypto operators.

With this acquisition, Coinsquare also aims to become one of Canada's largest crypto asset trading platforms, with diversified, compliance-compliant offerings across multiple business lines, including retail and institutional trading, cryptocurrency payment processing, and digital asset custody.

In response to rumors of a potential merger between WonderFi and Coinsquare, CoinSmart released a statement saying that it is aware of the rumors and is monitoring the situation.

As for the purchase agreement between Coinsquare and CoinSmart, the company said that it expects to be able to meet all its requirements. Coinsquare's attempted termination of the Share Purchase Agreement is due to internal issues at Coinsquare and not because of anything to do with CoinSmart or its business, CoinSmart further said in the statement.

The startup added that it “intends to vigorously contest Coinsquare's purported termination” of the agreement, if necessary. CoinSmart will also pursue available remedies to enforce its contractual rights, which include “the right to specific performance or the right to monetary damages,” it said.