More on Moonstone Bank
Last Friday I wrote about a report in the New York Times describing an investment earlier this year by Alameda Research Ventures in the holding company of a tiny Washington state-chartered bank now called Moonstone Bank.
Looking simplistically at the target’s miniscule pre-money equity as reflected on its financial statements filed with the Federal Reserve Board (a little over $6 million), and looking at the size of Alameda’s investment ($11.5 million), I suggested that it was difficult to see any way this was not a controlling investment. Further, although I included hedging language,1 I wrote that if this was indeed a controlling investment, this meant that the Federal Reserve Board had likely missed something by not requiring an application.
I now believe it is more likely that I, rather than the Federal Reserve, got this wrong. In a Twitter spaces interview over the weekend, Moonstone Bank’s Chief Digital Officer, Janvier Chalopin, stated that Alameda’s $11.5 million investment in the holding company was for “just under 10%,” of the company, valuing the company at approximately $115 million.
Then earlier today Moonstone Bank released a more formal statement (emphasis in original):2
In January this year, as a result of a capital raise effort to support our further development, we received an investment from a company that at the time had a pristine reputation and was a darling of the financial markets. Unfortunately, the unexpected collapse of this company negatively impacted countless individual investors, investment firms, vendors, counterparties and unfairly affected Farmington State Bank d.b.a Moonstone Bank’s reputation as well.
Alameda has a non-controlling interest in Moonstone, with no board membership and no involvement with management.
As every startup, we sought to raise capital to fund our business plan and growth. In January 2022, Alameda Research Ventures, LLC invested $11.5 million in Moonstone (through FBH, Moonstone’s holding company) for a non-controlling minority common-share interest (under 10%). Alameda has remained a passive investor, with no board membership and with no involvement in management.
Assuming the facts are as described in today’s press release, and assuming no other factors are present that would give rise to a controlling relationship, it could indeed be the case that Alameda’s investment is non-controlling.
If so, I made an error in my post last Friday by failing to consider the possibility that Alameda invested at a sufficiently high valuation such that an $11.5 million investment represented not a controlling stake but a less than 10% minority, non-controlling stake. I am comforted to a small extent that other, more distinguished, people quoted in the NYT article and elsewhere also failed to consider this, but even so it was a silly mistake by me to not at least note the possibility. Rather than jumping to the conclusion that the Board and the Reserve Bank got it wrong, I should have thought harder about potential alternatives, even if they seemed facially unlikely.
What Was a Fair Valuation?
So long as we are on the subject of Moonstone’s valuation, another statement from today’s press release stood out to me (again, emphasis in original).
Moonstone’s valuation was consistent with other similar technology Banks and Trust Banks startups at the time.
Because of Moonstone’s technology and data first strategy, solving for a known gap in banking, and the large potential it offers, the bank was seen as a financial technology bank and valued as such, with a multiple typical for similar entities. Other similar technology driven Bank and Trust Bank startups achieved significantly higher valuations during the same period, including multiple pre-launch, pre-revenue start-ups.
There is a reason I now work in blogging rather than in investment banking, so I would not take the following too seriously, but as someone with a casual interest in fintech (or fintech-adjacent) acquisitions of small banks for a few years now, Moonstone's statement did not sound right to me.
In particular, based on the table below that I threw together quickly,3 I am not sure it is right to say that other tech-driven banks indeed "achieved significantly higher valuations" than Moonstone during this time period. If anything, Moonstone looks to be an outlier in the other direction.
Moonstone’s management may offer a few protests.
First, the table includes mostly acquisitions by tech companies of what at the time were traditional banks, and Moonstone’s claim is that by March 2022 it was already a tech bank (or at least well along the path to becoming one), so these are not really comparable situations.
Second, Moonstone’s statement included a reference to trust bank valuations, and the targets in the table above were all more or less normal commercial banks. It is true that if you look at certain trust bank valuations maybe Moonstone’s valuation does not look like as extreme of an outlier: Paxos raised in April 2021 at a valuation of $2.4 billion, Anchorage raised in December 2021 at a valuation over $3 billion, and Protego earlier this year was reportedly seeking new funds at a $2 billion valuation.4 But then again that assumes both that those trust bank valuations were appropriate (were they?) and that Moonstone Bank is appropriately compared to such firms (is it?5).
To be clear, none of this is to necessarily suggest that anything nefarious went on, even if the valuation at which Alameda invested turns out to have been more than fully priced. Based on the statements over the weekend from Chalopin, Moonstone pitched FTX/Alameda on the investment at a time when FTX was throwing money at all sorts of projects.6 At the end of the day, “FTX and affiliated individuals made a poor business decision” would not be a surprising headline in light of recent events.
Thus, this may be a situation where the simplest explanation is in fact the correct one. Other explanations are also possible, however, and I look forward to reading (rather than writing) more about this in the weeks to come.
I wrote: “I want to be fair to the Board and Reserve Bank by acknowledging that we do not know what has been happening out of the public eye. If it was an error by the regulators, I think it is a bad one, but maybe there are facts that will come out which make clear this was not an error at all, or at least is an error the regulators are already working to address.”
Also notable in today’s statement was Moonstone’s explanation of its ties to Jean Chalopin, described in last week’s NYT article as “the chairman of Deltec Bank, which, like FTX, is based in the Bahamas” and whose most well-known client is Tether.
Jean Chalopin, individually and without any connection to Deltec Bank acquired Farmington State Bank (Moonstone) following all appropriate regulatory requirements.
In mid-summer 2018, Mr. Chalopin individually and without any connection to or without any involvement to Deltec International Group and its subsidiaries, began searching to acquire a bank in the United States to develop a new model of banking in which he strongly believes, to capitalize on the convergence of technologies and regulations to ensure needed and reliable banking services to customers. …
The operations and business of FBH Corporation and its subsidiary, Moonstone Bank™, are completely separate and apart from any other business owned by Mr. Chalopin, including Deltec International Group and its subsidiaries. Until the investment by Alameda Research, Mr. Chalopin was the sole stockholder of FBH since its formation.
Caveats, notes on sourcing, etc.
Valuations are all as publicly reported in securities filings or in press releases.
ROAs are pre-tax 12/31 YTD ROAs for the years in question as calculated by the FDIC
Total assets are as reported by the FDIC at the same link as above, based on call report data
There are of course a number of announced acquisitions not listed here where a valuation has not been publicly disclosed (recent examples: Brian Barnes/First National Bank of Buhl, Luna/Lead Bank, Credit Ninja/Liberty Bank). It is extremely possible that Moonstone Bank has better information about their comps than I do.
On the subject of things this blog got wrong this year, I wrote over the summer about looming deadlines for Protego (August 2022) and Paxos (October 2022) to meet the conditions set out in the OCC’s 2021 conditional approvals, which were only supposed to be good for 18 months, and open for business. Since that post, nothing has come out publicly from either the banks or the OCC, so I assume the OCC has granted extensions, notwithstanding the boilerplate in its conditional approval letters that “[t]he OCC is opposed to granting extensions, except under the most extenuating circumstances.”
For instance, it is not currently clear that Moonstone can engage in any digital asset trust activities at all. In the Twitter spaces over the weekend Chalopin stated that the bank is currently pursuing the authority to engage in digital asset custody activities but has not yet secured regulatory approval.
In today’s press release, Moonstone notes that “Alameda Research/FTX deployed more than $2 billion in venture capital across 179 investments, in regard of which the investment in our company represents less than 0.6%.”