Special Purpose Acquisition CONTAINERS

The SEC killed the old structure of US public SPACs with a vote last week. It’s time for a new generation of SPACs that will release shares into a DeFi-ready securities market. The core innovation is that we eliminate the SPAC phase and replace it with escrow of investor funds.

• This is cheaper for the investor because in the escrow phase, no transaction has taken place. The investor still controls the assets. There is no purchase, no accounting, no tax event.
• It is much cheaper for the sponsor. Until you close the deal, there is no regulated structure to set up and report on. This eliminates the primary cost of a SPAC. Setting up a new public company for the old generation of SPACs costs about $3M.
• It has low opportunity cost because investors can escrow the asset of their choice — including interest-earning assets like Sweep. They don’t rely on the SPAC to put money in the bank and return it. They bring their own bank. This is a new tactic that is only possible in DeFi.

I have promoted this idea before. Now, a new generation of smart contracts is making escrow more reliable and higher-yielding. And, we have a kick in the butt from the SEC.

How it works

An escrow phase transforms an Acquisition Company into an Acquisition Container, where the container is a bag of assets that investor have put into escrow and made available for a future deal.

1. Container sponsors open a pool online that goes through a series of steps.
2. Investors who are interested in the deal take assets they want to own anyway, and put them into a smart contract, and assign that smart contract to the Container.
3. Container investors can take their money back at any time during the formation period. SPAC IPOs have been easy to sell because the IPO investors take limited risk. They can resell the shares they get, and they can ask for money back with interest if they don’t like the ultimate deSPAC. They lose some time value and optionality.
4. Public SPAC investors get warrants (some extra upside) for committing to the SPAC IPO. Container investors can get warrants or other types of upside that is scaled according to how early they committed. This can accelerate the formation of the pool, and it gives investors an incentive to stay in the pool.
5. At a certain point, the assets are locked and can’t be removed until a timeout, or a proposed closing. Around this time, the container can issue its own DeFi-ready shares.

Skipping US public markets

SEC commissioner Hester Pierce focuses her dissent on a key problem with US public markets: “the troubling dearth of public companies and the specific challenges of small companies seeking capital in the public markets.”

She notes that over the last 30 years, the number of public companies in the US has declined from 8000 to 4200, and the average number of IPOs has declined from 412 to 132. It’s worth reading her full comments here.

I believe that the SEC has made a strategic choice. They see that US markets are globally dominant venues for trading stocks of large public companies that are purchased by index funds and ETFs. They have moved to optimize issuance, reporting, and trading for these large and liquid assets. They have (maybe not consciously) squelched competition by insisting on a level playing field that eliminates marketmakers (too expensive for highly liquid stocks), startups, crypto, and now SPACs.

There is also a change in the demand side that makes a public listing less useful. There are not enough long-only buyers for a new growth stock. Public stock buyers are mostly index funds, which buy established securities, or hedge funds that are quick to sell or even go short. The long-only institutional buyers have moved a lot of their money into private equity funds. The long-only individual buyers have moved their money into index funds, leaving a following that can support only a smattering of story stocks like Tesla.

DeFi-ready markets

A DeFi-ready securities market is designed to find long-only buyers in the universe of non-US professionals. They already have allocations to public markets and private equity. This third market gives them global distribution with DeFi tooling.

I believe that an “IPO” in this market will be designed to give investors access to a one or two year holding period. We can think of public markets as being designed to support immediate liquidity for ETFs that need to buy and sell the underlying as soon as their customers buy and sell. Private equity markets provide liquidity every 6–8 years. Many professionals have both types of allocation, and might be interested in a market that delivers liquidity and holding times between these extremes.

A tokenized market can program access to liquidity in various time frames with tactics like:

• Unlocks over time
• Specific windows for trading. This gives issuers a chance to prepare disclosures, concentrates liquidity, and it ensures that their assets won’t get tanked by sell orders in time when nobody is ready to bid.
• NAV lending, as DeFi-style margin lending.

Tokenized channels for private funds

Private funds with limited partner (LP) agreements are an extremely successful structure. That doesn’t stop the general partners from trying to sell their LP shares in a tokenized format. They believe that this will help them reach new markets.

However, nobody buys the tokenized LP offers. That is partly because they need to make an extra effort to custody them. It is partly because they do not get anything for the extra effort — which is why we need to add DeFi services. Mostly, it is because the economics of the tokenized and securitized offer are WORSE than the economics of the standard LP agreement.

One economic problem is cash drag. In a standard LP agreement, the investors only send money when it is needed. In a tokenized and securitized offer, they send in money when they buy the offer, and then the money sits around. An escrow variant of this offer would increase their cash efficiency. It would allow them buy an asset that they want to hold anyway, and put it into an escrow envelope for the fund.

In this formulation, a fund is like a SPAC, but with multiple closings.

Collaborate

Contact me if you want to collaborate on using DeFi to build commercial-scale capital markets.