The Three Big Transitions Reshaping Finance
Three phenomena have exploded since COVID: digital assets, Robinhood, and SPACs.
Three phenomena have exploded since COVID: digital assets, Robinhood, and SPACs.
Ever since Covid disrupted our lives, two themes have emerged. First, a feeling that we are living in an antechamber to a new and still-undefined era. And second, a pattern of hybrids, from homes converted into hybrid spaces of living/working/schooling, to expectations of a new office hybrid that will mix virtual and in-person meetings.
But what about the world of finance and securities markets? There, too, we can find patterns of transition and hybrids. Consider three phenomena that began before Covid but have exploded in growth since then: digital assets, Robinhood, and SPACs.
Start with the rise of cryptocurrencies, digital tokens and other such assets, which remain very much in a transitory stage (like the “Wild West,” SEC Chairman Gary Gensler recently observed). Even as the crypto asset class has grown to an estimated $1.6 trillion, basic questions remain unanswered. Are digital tokens securities or commodities? Are decentralized finance platforms really securities exchanges? Are data miners and other digital service providers really broker-dealers? Should the SEC permit Bitcoin ETFs? And who should regulate these products, services and entities—the SEC, the CFTC, or banking regulators?
Gensler has called on Congress to give the SEC “additional authorities to prevent transactions, products, and platforms from falling between regulatory cracks.” Specifically, he wants “additional plenary authority to write rules for and attach guardrails to crypto trading and lending.” And the U.S. House has passed a bill (H.R. 1602, the Eliminate Barriers to Innovation Act of 2021), which would require the SEC and CFTC to establish a working group on digital assets.
Some of what passes as crypto innovations pretty clearly seems to be old-fashioned investment products dressed up in digital garb. That would include any stablecoins that function like money market funds and those tokens that fall within the definition of a security. Nonetheless, there is no denying that crypto mixes digital technology with traditional forms of finance in a hybrid of innovation.
Second, consider Robinhood, which has exploded into view along with Redditor-fueled moonshot trades in meme stocks. Its proclaimed mission “to democratise finance for all” may invite skepticism, but the company can make a strong claim to having attracted a surge of first-time retail investors, representing a younger and more ethnically diverse customer base. Powering that success is Robinhood’s sleek mobile app—and its arsenal of gamification tools to entice and engage customers. But do the nudges and gamification tools cross the line into the realm of investment advice?
“Once individuals become customers, Robinhood relentlessly bombards them with a number of strategies designed to encourage and incentivize continuous and repeated engagement with this application,” the Massachusetts state securities regulator alleges in a lawsuit against Robinhood. The complaint points to several such techniques, from celebrating customer trades with confetti (a practice Robinhood has since abandoned) to plying customers with lists of most-traded and most-popular securities on its platform.
Should practices like these be subject to the fiduciary standard of an investment adviser? Or to the new Best Interest standard for broker-dealers? Robinhood has called the regulator elitist and says it isn’t making recommendations. Whatever the outcome of the lawsuit, these gamification techniques make Robinhood appear different in kind from the (boring?) practices of traditional broker-dealers that merely execute customers’ trades. The gamification of mobile trading apps may represent a hybrid between standard broker-dealer practices and full-fledged investment advice.
Third, consider SPACs, which have been around since 2003 but have exploded in popularity in the Covid era. In a hugely successful marketing campaign, SPACs have presented themselves as a kind of poor man’s private equity. If true, that would make SPACs a hybrid between private investment opportunities and public markets.
The deSPAC merger—the key event in the life of a SPAC—is also a hybrid. This is when the SPAC merges with a private operating company, allowing the target to become a public company without going through an IPO. Or is the merger itself really an IPO?
That’s precisely the question raised by John Coates, a Harvard Law professor who has become a top SEC official. In a provocative speech on April 8, Coates argued that the deSPAC merger is an initial public offering, because it is the first time the private operating company is introduced to the public. One speech, however, does not make SEC policy. And Coates’ theory remains untested in court. Nonetheless, it suggests how the deSPAC merger can be considered a hybrid between traditional forms of IPO and merger transactions.
At a House Financial Services subcommittee hearing on May 24, Michael San Nicolas, Guam’s delegate, asked how a SPAC differed from a closed-end equity (mutual) fund. The question may have seemed arcane at the time, but in retrospect it appears to have foreshadowed a series of blockbuster lawsuits against SPACs. Former SEC Commissioner Robert J. Jackson, Jr. and Yale Law Professor John Morley have joined in a lawsuit against Bill Ackman’s SPAC, Pershing Square Tontine Holdings Ltd. (ticker: PSTH), which raised $4 billion to become the single largest SPAC, and followed up with suits against two other SPACs, GO Acquisition Corp. and E.Merge Technology. The suits allege that the SPACs are really investment companies, like mutual funds and ETFs, because they invest in securities while searching for a merger partner.
“Under the [Investment Company Act of 1940], an Investment Company is an entity whose primary business is investing in securities,” the lawsuit against PSTH argues. “And investing in securities is basically the only thing that PSTH has ever done.”
Ackman says the suit against his SPAC is meritless, but warns, “Because the basic issues raised here apply to every SPAC, a successful claim would imply that every SPAC may also be an illegal investment company.” The suit suggests one more way that SPACs could be considered a hybrid—a cross between an investment company (like a mutual fund) and a publicly traded company.
One wonders how we will look back on these market developments a decade from now. Will SPACs, cryptoassets, and mobile trading apps be seen as hybrids that emerged in the antechamber we are living in now?
Reprinted by permission of Barron’s. Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: September 2, 2021.
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
Andy Warhol’s portrait of the late Queen Elizabeth II sold for C$1.14 million (US$855,000) at an auction last week, setting a record price for an editioned print by the Pop artist, the Canadian auction house Heffel said.
Warhol created the screenprint in 1985 based on a photograph taken by Peter Grugeon at Windsor Castle in 1975, which was released in 1977 on the occasion of the Queen’s Silver Jubilee, according to Heffel.
Queen Elizabeth II died in September at the age of 96 after a seven-decade reign, making her one of the longest-reigning monarchs in history.
The portrait features the then-reigning Queen wearing the diamond-and-pearl Grand Duchess Vladimir Tiara and a matching necklace, and a blue sash pinned with a medallion with a miniature portrait of her father, George VI, on regal blue background. The outline of the portrait was accentuated by diamond dust, which glimmered in the light.
This print is one of only two editions signed as “HC” for Hors d’Commerce (not for sale) aside from the 30 numbered editions with this colour scheme and diamond dust, according to Heffel.
The consignor acquired the print circa 1996 from Bob Rennie, a prominent Vancouver businessman and collector, according to Heffel, which declined to disclose the identities of the consignor and the buyer.
Offered as a highlight at Heffel’s 85-lot auction of Post-War and contemporary art on Nov. 24 in Toronto, the print realised a price more than double its presale estimate, and was the highest achieved by an editioned print by Warhol, the auction house said.
The previous auction record for an editioned Warhol print was for a piece from the same edition, also in the regal blue colour, sold in September at Sotheby’s for £554,400 (US$662,000), according to Heffel.
The most expensive Warhol work is his portrait of Marilyn Monroe, Shot Sage Blue Marilyn, which was acquired by gallerist Larry Gagosian at a Christie’s auction in May for US$195 million, marking a record price for a work by an American artist at auction.
From faulty family villa to modern beach house.