The bankrupt crypto lender may have made changes to its corporate structure when it raised money last year. This could be under investigation. Celsius Network, a cryptocurrency lender, is about to enter a transitional phase. Shareholders will face off against their beleaguered customers. Customers may be at a significant disadvantage as Celsius Network auctions its assets.

A recent motion seeking to appoint an equity preferred committee aims to place shareholders at the top of the queue. This is in relation to the sale of Celsius’ custody firm GK8 and Celsius’ mining operations. (Celsius’ assets will be sold later in the month. 

One thing that will be of interest is the changes Celsius made to its corporate structure during the last year’s Series A funding round. This round raised $750 million months before the company’s collapse.

According to Vincent Indelicato, a partner in law firm Proskauer Rose, this transaction placed customers behind equity owners when it came to getting repaid if Celsius became bankrupt or its valuable crypto-mining assets were sold. 

He said that this is something the independent examiner, who was appointed to determine why Celsius fell apart, will want to consider.

Indelicato stated that equity holders have a direct claim on any value derived by the sale or monetization of mining assets. 

This is to the exclusion of all customer claims. “And I believe that the examiner, as well as other parties such as the committee, will closely scrutinize this transaction to determine, among others, how and why Celsius moved customer accounts in that manner.”

One of the most significant unanswered questions in Celsius’s case is the fate of customers and deposits. Amateurs being the last to be repaid behind bankers and lawyers is not a common story in bankruptcy.

The stakes have risen since Celsius filed for bankruptcy in July. The latest blow was the sudden resignation by CEO Alex Mashinsky. He was later reported as having withdrawn $10,000,000 from his firm one month before its accounts were frozen.

Celsius’ Series B fundraising started in the early 2021s and was completed by November. As indicated in , the U.S. entity was responsible for moving the consumer business. 

This is a modification to the terms of service which users had to accept last year. Celsius’s mining operations were transferred to the Celsius U.K. entity. GK8, the custody technology firm owned by Celsius, was also acquired by Celsius.

The external examiner will investigate whether the Celsius mid-fundraising ownership change might have been linked to a fraudulent transaction, which essentially defrauds creditors.

Celsius discovers that the consumer business is having regulatory problems or insolvent somewhere in the Series B due diligence. Who knows? 

Thomas Braziel, founder and chief investment officer at 507 Capital, said. They have to make things work. Investors will provide money to the company at a high value, but they must be the first to receive mining operations and GK8 custody services.

The committee of unsecured creditors will at the very minimum review the preferred equity investments. They will also identify whether proceeds from customer assets were used to finance the mining operations. Gregory Plotko is a partner in Crowell & Moring’s New York bankruptcy and creditors rights practice.

Plotko via email stated that the characterization of customer funding (either an intercompany loan, or equity investment) will play a significant role in determining each group’s relative rights to the allocation value.

One extreme option is to invoke “substantive consolidation”, a term that bankruptcy insiders are familiar with. This refers to when a court allows consolidation of all debtors assets into one pool and not under separate entities.

New York bankruptcy judges won’t allow substantive consolidation unless it is clear that it is impossible to unravel each transaction. The bankruptcy of Augie/Restivo Baking Co. is an example where consolidation was granted, but later appealed against. Substantive consolidation was later used in the 2003 WorldCom scandal.

Proskauer’s Indelicato stated that sometimes, such as with fraudulent transfers in bankruptcy court, the mere threat, uncertainty, and associated expense and delay of litigation are enough to get the parties to settle. In practice, many of these theories and claims never see the light of day. They are instead used to exert pressure.

A potential conflict of interest is also suggested in this case. It concerns White & Case, the law firm representing Celsius’ creditors.

White & Case lawyers also advised WestCap, an equity firm, on its participation in the Celsius Series B round. This could lead to White & Case having to investigate the due diligence performed by its own firm during fundraising.



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Angie Byrd