- Reg CF deals are about to explode…
- The two most valuable fintech companies in the world…
- Don’t be fooled by Apple and Google’s peace offering…
In South Korea, the number eight is considered to be a lucky number. It is thought to bring money and luck. The more eights the better.
Which is most certainly why South Korean-born investor and founder of Archegos Capital Management, Bill Hwang, chose the building located at 888 Seventh Avenue as the location for his office. He even chose an office on the 38th floor.
Archegos is getting a lot of attention right now… not the good kind.
Mr. Hwang used the fund to manage money for himself and his family. It is reported to have about $10 billion under management. And it did something that I never recommend that my subscribers do – it used massive amounts of leverage.
We don’t yet know how much, but the range is anywhere between three to 10 times the assets under management. That means that Mr. Hwang levered up and was trading – not investing – $30 to $100 billion in assets.
And it all went wrong.
Archegos had concentrated its positions in the names of a few limited stocks like ViacomCBS, Discovery, GSX Techedu, and Vipshop Holdings. This was all clearly done in an effort to drive up share prices and make more money with all that leverage.
But the share prices didn’t cooperate. They started to drop. And that’s where everything went wrong. It forced the liquidation of positions of more than $30 billion.
It is a classic margin call. Archegos didn’t have the underlying capital to cover the losses and it had to rush to sell tens of billions worth of equities as quickly as possible. The stocks went into a freefall.
The collateral damage is impressive.
Shares of Credit Suisse Group are down 16.6% in the last two days due to losses estimated around $3.2 billion.
Shares of Japanese bank Nomura are down 17% in the same time frame
It’s all because these banks had exposure to the defaults that Archegos made on its margin calls. Credit Suisse, Nomura, and others were forced to exit the leveraged positions that Archegos had built up. We don’t actually know how large the damage is yet.
Who’s at fault in a situation like this?
Certainly, Archegos took on way too much leverage and made some terrible investment decisions, resulting in this disaster.
And the banks clearly didn’t have the right risk management policies in place. Otherwise, they wouldn’t have built the leveraged positions for Archegos in the first place.
Fortunately, unless normal investors held positions in the affected banks, or the companies whose positions were liquidated, they won’t be impacted at all. That’s the good news.
As for Archegos… it turns out eight might not be that lucky after all…
And one last note before we turn to our topics for today…
A week from tomorrow, I’ll be presenting on America’s Last Digital Leap. A digital leap is when a whole industry goes from analog to digital – think of what Uber and Lyft did to the taxi industry… or what Airbnb did to the hospitality industry.
These are big shifts that improve our lives… and give us the chance to profit.
And there’s one industry that has yet to make the leap… until now. This $11.9 trillion industry is cutting through the red tape to finally go digital. And now’s the time for us to get in position.
If you want to learn more, including my top way to play the coming digital leap, then go right here to save your spot. It’ll all happen April 7 at 8 p.m. ET.
Now let’s turn to today’s insights…
A historic day for the private investment markets…
As regular readers know, early stage investing is one of our core themes here at Brownstone Research.
And I’m happy to say that March 15 was a historic day for the industry. That was the day the Securities and Exchange Commission (SEC) lifted the cap on Regulation CF offerings from $1.07 million to $5 million.
Reg CF refers to “crowdfunding” offerings that allow investors to buy equity in private companies. What sets these deals apart is that they are not subject to accreditation laws. All investors, regardless of accreditation status, are permitted to participate.
So Reg CF is an avenue for normal investors to invest in private companies. But the problem has always been the $1.07 million cap.
From the perspective of the most promising private companies, only being able to raise $1.07 million wasn’t enough to make Reg CF deals worthwhile. That amount of money wouldn’t even provide cash runway for 12 months for most early stage companies.
Plus, the best private companies can typically tap the venture capital (VC) firms for the early stage capital they need to grow. So spending time on all the paperwork and communications needed for a Reg CF offering just hasn’t been worth the trouble.
That’s why I haven’t recommended any Reg CF deals here at Brownstone Research. The best private companies haven’t been willing to go this route.
That all changed on March 15.
$5 million is enough to make a Reg CF deal worth pursuing. And the first Reg CF deal just confirmed this.
An early stage company called Gumroad just completed the first $5 million Reg CF offering. And it raised the entire $5 million in just 24 hours.
This shows us that normal investors are champing at the bit to get access to private deals. We can be sure that other private companies took notice. We’re at the start of a multiyear trend.
What’s more, Gumroad’s investors got in at a $100 million valuation. That’s actually large for an early crowdfunding deal, but it is still a fraction of the valuation that could follow.
And what’s interesting here is that Gumroad paired this $5 million raise with a $1 million private offering to strategic individual investors. Together, this formed the company’s Series C funding round – with no money coming from VC firms.
Typically, Reg CF deals tend to be done at the Seed or Series A round, which makes this first raise a bit unusual.
VC firms are notorious for imposing what could be considered one-sided terms for the private companies they invest in. I suspect many early stage companies will look to Reg CF deals as a means of bypassing the VCs – at least in their early rounds.
So we can expect to see an explosion of Reg CF offerings in the coming months. This is the beginning of a major transformation in how early stage capital is formed.
And here’s something I haven’t shared publicly before…
I have been working aggressively behind the scenes to build a new investment research product focused on these private investment opportunities.
This new service should be ready for launch within the next six months or so. Once it’s ready, it will enable subscribers to capture investment returns on par with those the VCs have reserved for themselves for over a decade now.
And our private investing service at Brownstone Research will be unlike anything available today – as I hope subscribers to my premium research products have come to expect. I can’t wait.
Readers can expect more details on this new service in the months ahead.
The two most valuable private companies on Earth…
Speaking of private investments, two recent transactions have catapulted both Stripe and Coinbase to absolutely impressive valuations.
We’ve talked about both of these companies before. They are two of the best financial technology (fintech) companies in the world. And they are now the two most valuable private technology companies on Earth.
Stripe’s technology powers online payments for internet commerce. It is the link between financial institutions and merchants that enable e-commerce transactions. Anyone who has purchased a product online has likely used Stripe’s services and not even known it.
And Stripe just raised a whopping $600 million in a Series H funding round. The company is now valued at $95 billion. That is an astronomical valuation for a private company.
This valuation puts Stripe right in line with Square (SQ), which is another fintech company we talk about often in these pages. As I write, Square boasts an enterprise value of $94.3 billion… Except it’s a public company.
Not to be outdone, Coinbase just completed a secondary transaction that valued the company at $100.2 billion. Remarkable.
As a reminder, Coinbase is the world’s most successful digital asset exchange. And it also provides cryptocurrency custody services for corporations and institutional investors.
Coinbase has already filed to go public through a direct listing. Shares could be trading on public markets as soon as next month.
As for Stripe, it is expected to file for a public offering in the coming months as well. What we don’t know is if it will be a direct listing or a traditional IPO. But at a $95 billion valuation, we can be sure that Stripe won’t be backing into a special purpose acquisition company (SPAC). It’s way too big for that.
I’m very excited to see both of these great companies finally going public.
However, it is important to note that these are both large blue-chip companies now, and I expect that they will go public at incredibly high valuations. Understanding the actual value of a company is one of the most critical aspects of being a consistently successful investor.
Epic Games has had a major impact on the app store battle…
We talked about how Epic Games had thrown down the gauntlet in the app store space last August. Epic filed lawsuits against Apple and Google for “anti-competitive behavior and monopolistic practices” with their respective app stores.
To bring newer readers up to speed, Epic Games created Fortnite, which is one of the most successful video games in history. Gamers who want to play Fortnite on their smartphone or tablet can download it through Apple’s App Store and Google’s Play Store.
Fortnite is free to download, but it offers in-game purchases. Players can spend real money to buy items and in-game currency inside of Fortnite’s digital world.
These purchases flow through Apple and Google’s payment networks, and the tech giants take a 30% commission on each transaction. That’s what the lawsuit was about.
Epic Games felt like this commission was too high. And when it tried to handle in-game payments directly to bypass the commission, both Apple and Google removed Fortnite from their app stores.
Epic Games then pointed out that Apple made $22 billion and Google made $11.5 billion from app store purchases in 2019. All for simply hosting games and apps on the platform. The developers did all the hard work. That’s the basis of the lawsuit.
Well, Apple announced last December that it was cutting its app store commissions to 15% for the first $1 million in sales. It will only take 30% commissions once an app has surpassed that $1 million threshold.
This was a peace offering from Apple to app developers. And Google just followed suit this month, announcing the exact same changes.
This looks great on the surface. And it will certainly help those app developers who never eclipse $1 million in sales. However, this change will not materially impact the total app store revenues of Apple and Google.
Here’s the thing – 99% of apps never surpass $1 million in sales. Apple and Google will take a $150,000 haircut on each of these apps, but that’s a drop in the bucket. The lion’s share of total app store revenue comes from the 1% of apps that drive enormous sales much greater than $1 million.
For example, Fortnite alone had driven $1.2 billion in sales when it was pulled from Apple and Google’s app stores last August. Dropping commissions to 15% on the first million is completely immaterial. Neither Apple nor Google would notice the difference.
So it’s no surprise that Epic Games has rejected the peace offering, electing to press forward with its lawsuits. We’ll keep an eye on that in the months to come.
Still, this change will encourage small-time app developers to continue to work with both Apple and Google.
Editor, The Bleeding Edge
P.S. Like I mentioned above, I’ll be hosting an important event for every investor who’s kicked themselves for not investing in Amazon back when it first went public.
You see, when an entire industry goes from analog to digital, I call that a digital leap. That’s what Amazon did to the retail space, making it simple to order whatever we want with the click of a button.
But there’s one industry that hasn’t made this leap yet… and its move could be the very last digital leap.
To find out all about this industry… and the best way to profit from the digital leap that’s just beginning, please go right here to sign up for my upcoming event: America’s Last Digital Leap, taking place April 7 at 8 p.m. ET. It’s going to be an exciting night.
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