Earlier this year, I wrote about MicroStrategy’s Bitcoin treasury strategy. At the time the company was successfully raising capital from a series of convertible bond issuances and using the capital to acquire Bitcoin. MicroStrategy’s public stock shareholders in turn rewarded these choices by sending the company’s stock price higher.1
Since then, MicroStrategy moved on from issuing convertible bonds (there are only so many convertible arb investors) and started issuing preferred stock and most recently, common stock. At some point along the way, the company also changed its name to just Strategy, because, why not?
Strategy’s common stock shareholders, however, do not seem thrilled to have their ownership diluted through the latest additional common stock issuance. And this discontent is now showing up in the company’s share price. Fair enough. But that’s sort of beside the point, for me at least.
Given the nature of Ivy Invest, it should be no surprise that I’m always interested in the intersection of demand and access. One of the more notable side effects of Strategy operating as a Bitcoin treasury is that: 1) governance-wise, many institutional investors can invest in stocks, 2) governance-wise, many institutional investors cannot invest in Bitcoin, 3) some group of institutional investors want to invest in Bitcoin but governance-wise cannot, and so 4) Strategy is a clever, if imperfect, solution for that group of institutional investors.
Plenty has been written elsewhere about Strategy’s public share price and its premium over the value of the company’s Bitcoin. As I wrote the first time around, I have no particular interest in discussing Strategy’s capital structure or special insight into the value of Bitcoin. But I have tended to agree that the ability to solve the Bitcoin access problem for certain investors is worth something, some premium, for those investors.
Where there is high demand but inconsistent access, the market generally tries to find solutions. Sometimes, those solutions show up in unexpected places. And Strategy is, in its own way, an example of that dynamic.
Of course, the most obvious place where high demand meets inconsistent access has to be private market companies. More specifically, certain high growth private tech companies that appear often in news cycles. Which brings us, finally, to this week’s question.
The Robinhood proposal on tokenizing private companies is interesting. How will it work? Are the tokens going to be collateralized? Is it potentially a disaster waiting to happen given how much overhyped private companies can go up and how volatile retail flows can be?
I also find the Robinhood proposal super interesting! And I also, admittedly, share your questions around how it will all work. I unfortunately don’t have any more insider information than you do on the mechanics.
Recognizing that we can only guess at how it will all work, I still think the conversation is worth having. If nothing else, it’s a chance to reflect on how lopsided the demand versus access equation has become for some of these private market companies. That in turn is changing how these companies interact with capital markets. It is also leading to strange and distorted solutions for non-institutional investors looking for access, including the rise of multi-layer SPVs (like Russian nesting dolls, but with SPVs and fees instead of dolls).2
If we take a generous interpretation of Robinhood’s tokenization proposal, we might focus on how creatively it addresses the demand versus access challenge in private markets.3 Compared to some of the current solutions floating around, Robinhood’s approach feels like taking a sledgehammer to the access game.
And we may not know the specifics, but mechanically speaking, there are some assumptions here that might be safe to make. Robinhood has already announced its own blockchain.4 Presumably the tokens representing the digital versions of private company shares will be issued on the Robinhood blockchain. By virtue of being on the blockchain, transactions should be transparent and traceable. The chain of token owners should be verifiable, token pricing should be readily and constantly visible, and trading should be nearly instantaneous and efficient. If the ambition is to make access to private companies more readily available, these are huge shifts.
The gray area when it comes to tokenization (and this is the case not just for Robinhood, but any time we’re talking tokenization of a real world asset) is how ownership of the token relates to ownership of the real world asset. In this case, a key question might be: does any given Robinhood-issued private company token tie to the actual shares of that private company? If tokens are actually collateralized by shares of private companies (i.e., if Robinhood maintains ownership of the shares of each private company on which it issues tokens), then token owners could take some comfort in the value of their tokens being anchored by real world shares.
Now, I would argue that in the best case scenario for private company token holders, there would be an explicit transfer of ownership rights extended to the tokens. The private companies themselves would recognize token ownership as equivalent to share ownership. OpenAI’s explicit rejection of Robinhood’s proposal, however, suggests that investors probably should not count on this scenario.5
In other words, the likely assumption is that Robinhood-issued private company tokens will be, at best, backed by Robinhood’s ownership of shares.
I would be remiss if I didn’t point to the possibility that Robinhood could issue tokens without any company shares to serve as collateral. Or that even if there are shares to serve as collateral, the rules between tokens and Robinhood-owned shares (e.g., who gets to vote them) would still be up to Robinhood. It’s all still very much a mystery.
Finally, and I won’t get into it here, but there is a worthwhile debate to be had around whether Robinhood’s tokenization effort effectively allows companies to raise capital from public market investors while simultaneously circumventing the requirements for being an SEC-registered, publicly traded company. Some might say yes, and I would tend to agree.
On the other hand, the best/funniest counterpoint that I’ve heard – crypto often trades without intrinsic value, so really, from that perspective, there should be no expectation that Robinhood’s private company tokens have any intrinsic value either.
It’s a wild argument, but there you go.
And with that, I’ll wrap up this week’s newsletter. Thanks for joining! As always, reach out with questions: askacio@ivyinvest.co.
See you in two weeks,
Wendy
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I don’t know that it needs to be said, but I’ll say it anyway – the multiple layers of typically 20% incentive fees nested across these mutant SPVs massively erode potential returns for participating investors. That doesn’t even factor in the potential risks around ownership and documentation. These are not vehicles that institutional investors would consider.
Although Robinhood’s tokenization announcements have been directed exclusively toward European investors, I would assume that the goal is ultimately to expand access to U.S. investors.