SPACs, NFTs, And Equity Crowdfunding

The financial world is rapidly changing. It seems almost every week there is a new development in the world of Fintech. So much so, that I spend nearly all of my working hours studying and researching financial markets, investing strategies, and general business, yet I can barely even keep up.

All of these changes have many investors wondering, “what are financial markets going to look like in the future?”

While I don’t have a definitive answer to that question, I want to walk through what it might look like, and I want to do it in relatively plain English. There are plenty of resources on the internet about all of these assets that use fancy financial lingo and have complex explanations. Instead, I am going to explain them in what I consider to be easy-to-understand ways with plain English.

First, let’s take a look at SPACs.

SPAC stands for a Special Purpose Acquisition Company. SPACs are sometimes known as “blank check companies”. Think of what “blank check” means in other financial areas of your life, such as giving someone a blank check. The person receiving the blank check has a financial instrument in which they can write any amount on and receive that amount of money. While it’s not quite the exact same for a SPAC, it’s similar.

A management team will create a company that doesn’t sell any products or services, rather its main purpose is to acquire another company. This management team will take the company public on a stock exchange, then search for a potential acquisition. Investors in a SPAC are essentially giving the management team a “blank check” to go buy a company they believe in because the investors have trust in the management team.

The reason the original company, the SPAC itself, is taken public at the very beginning is because one of the goals is to acquire a private business that can then become a publicly traded company right away without going through the normal IPO process. This is possible due to the SPAC already being publicly traded.

SPACs have risen and fallen in popularity over the decades, but right now, it’s one of the hottest trends on Wall Street. Could SPACs be around to stay this time, and be the future of financial markets? Trey talks to Jason Karp about SPACs and why they’re so popular in this episode of We Study Billionaires. I also recently had the CEO/Chairman of a SPAC, and the President of the acquired private company, as guests on this episode of Millennial Investing.

All of the assets we’ll talk about today are interesting, but this next one might be most interesting of all.

I’m not quite sure if interesting is good or bad, but it’s certainly interesting nonetheless.

This asset is NFTs.

NFT stands for Non-Fungible Token.

Before we get into the details of NFTs, it’s important to understand the difference between fungible and non-fungible. Something that is fungible is not unique and can be replaced with something else, whereas non-fungible is the exact opposite — it is completely unique and can never be replaced. Bitcoin is fungible — you can trade one bitcoin for another and you’ll still have the same thing — a bitcoin. However, if you have a one-of-a-kind item and you give or trade that away, even for another one-of-a-kind item, you will no longer have that exact one-of-a-kind item that you first had. Think of a piece of artwork or sports card that only ever had one created.

That’s where NFTs come in.

NFTs can be anything digital, but right now, all of the hype is around sports cards, digital art, and Jack Dorsey’s first tweet (yes, a tweet really sold for nearly $3 million). Other items receiving, what I consider absurd, purchase prices are videos, GIFs, and sports cards. Investors are approaching this similar to traditional fine art collecting, but with a modern spin on it, with digital art.

As of right now, most NFTs are part of the Ethereum blockchain. However, there are other blockchains that have implemented their own versions of NFTs to “compete” with those on Ethereum’s blockchain. Ethereum is a cryptocurrency, similar to bitcoin, but it also is a blockchain, like Bitcoin, that supports NFTs. (side note: in case you’re like me and was confused by the correct capitalization — generally, bitcoin is the cryptocurrency and Bitcoin is the blockchain). On Bitcoin Fundamentals, Preston chatted with Pierre Richard & Ben Carman about Smart Contracts and what it means for Ethereum.

I mentioned a real world example of an NFT previously with Jack Dorsey’s tweet, but I want to provide a few more. According to Christie’s, Beeple sold “Everydays – The First 5000 days” as the first purely digital artwork sold by a major auction house — it sold for about $69 million. YouTube celebrity Logan Paul sold clips from his YouTube videos as NFTs for up to $20,000 each, as well as a Logan Paul Pokemon card. What’s most fascinating (or concerning?) about the Logan Paul YouTube videos is that the clips that were sold are available, for free, on YouTube. Nike has even tried entering the world of NFTs by trying to bring them to real-world items through its CryptoKicks platform. It patented its method for verifying sneaker’s authenticity, using NFTs.

Let’s look at one more asset class that could potentially be the future of financial markets — equity crowdfunding.

Similar to SPACs, equity crowdfunding has risen and fallen in popularity over the years. When it first became available, it was all the rage. That rage eventually died off a bit, but it has made somewhat of a comeback. I’m not writing about equity crowdfunding today because of any current hype surrounding the asset class, rather it is because of an interesting development that recently became available.

If you’ve followed equity crowdfunding at all, you likely know that one of the biggest issues with it has always been its lack of liquidity. I talked with Howard Marks, the Co-Founder and CEO of StartEngine, the world’s leading equity crowdfunding platform, and what they’re doing is fascinating. They’re attempting to solve this liquidity issue.

Through StartEngine Secondary, investors are now able to publicly trade their investments in startups with other investors.

This has implications for both companies and investors. For companies, going public on stock exchanges is very expensive, but sometimes a necessary evil. However, with being able to raise large amounts of capital through equity crowdfunding and then trade shares on an exchange without being traditionally “publicly traded”, at a much lower cost and level of complexity, could this change how company’s approach the IPO process?

For investors, the traditional stock market is typically the place most go because of the ease-of-access and liquidity. However, with both of those characteristics being brought to equity crowdfunding, could there be a shift in investor’s focus over the next decade?

And, of course, it goes without saying — the traditional stock market, and even cryptocurrencies, are still viable options as “the future of financial markets”. There are likely other assets available now, or will be in the future, that are viable options as well.

I wasn’t an investor in the early 2000’s to experience the Dot Com Crash personally, nor was I 13-14 years ago during the Great Recession. However, I have studied both of these periods of time extensively and I can’t help but draw parallels to them from today.

That said, just earlier today, as I write this newsletter, I got off a call with one of the brightest minds in the financial world — Raoul Pal, Co-Founder and CEO of Real Vision. He argued that this isn’t like those times — this time truly is different.

“This time is different” has been muttered many times in history, when in fact, that time was not different. However, could this be a technological shift and advancement that does disrupt and revolutionize the financial markets? Could this time truly be different?