Meme capitalIn the last few weeks some stocks went up a lot for weird reasons. People on Reddit liked them, there were short squeezes, there was buying pressure driven by call-option hedging, Elon Musk was tweeting, stuff like that; they went up for reasons unrelated to any changes in the business prospects of the underlying companies. Often these were somewhat beaten-down companies: A lot of people had shorted their stocks because they were in bad shape, and the Reddit crowds buying them were moved by nostalgia or irony or a desire to defend the underdog or take revenge on evil short-selling hedge funds. One obvious reaction to this would be for those companies to raise money by selling stock. That is corporate finance 101. You need money. Your stock price is going up because people are clamoring to buy your stock. The market is sending a signal that you should sell stock, at the high prices, to raise the money, to make your company better, to justify the high prices. On the other hand everyone knew that the stocks were up for weird reasons, and that makes lawyers nervous. If your company is worth $30 a share, and all of a sudden it is selling at $200 a share, it seems … wrong … to sell stock to the public at $200 a share. That last sentence is not the law, and in various ways it doesn't even make sense. (Who's to say what your stock is "worth," if not the market? Somebody is buying stock at $200 a share, which means somebody is selling it—why not you?) Selling overpriced stock—stock that you know is overpriced, that everyone knows is overpriced—is not in itself securities fraud. It just makes people nervous. Some companies got over their nervousness and hit the bid, and others didn't. The most notable company that did is probably AMC Entertainment Holdings Inc., which launched an at-the-market offering to sell 50 million shares of stock as it was soaring on meme-stock enthusiasm. It also did other debt and equity deals, and saw a convertible bond convert into stock; it raised over a billion dollars of equity in a week of meme-stock enthusiasm. "A week ago it was not crazy to think this company was doomed," I wrote at the time; "now it is entirely possible that it will survive and thrive and show movies in movie theaters for decades to come because everyone went nuts and bought meme stocks this week." The most notable company that didn't is probably GameStop Corp., the memeiest of the meme stocks, whose management was absolutely silent about its bizarre 1,700% rise. The very first time we talked about GameStop around here—ahh, remember when we didn't talk about GameStop around here?—I suggested that it should use its meme-stock status to raise money in an at-the-market offering. But it didn't, I assume for understandable legal-nervousness reasons. (Or possibly not having much use for the cash?) By last week I was offering to write the prospectus for GameStop. "I am not the sort of writer who has a novel inside me straining to get out or anything like that," I wrote, "but it is very possible that I have a GameStop ATM prospectus inside me that needs to come out into the world." Of course I didn't really need GameStop to hire me. I could just sit down and write a GameStop prospectus as a work of fiction, a jeu d'esprit of securities disclosure. I did not do that because, you know, I am busy. I thought about it a little though. The U.S. Securities and Exchange Commission's Division of Corporate Finance thinks like I do. As far as I can tell they also imagined what it would be like if GameStop filed a prospectus for an at-the-market offering during its meme-driven rally, and they imagined how they'd respond, and then they actually wrote the response, and here it is. It's not about GameStop, really; it's a "Sample Letter to Companies Regarding Securities Offerings During Times of Extreme Price Volatility." It's the sort of thing that the SEC would send to any company looking to take advantage of its stupid stock price by selling stock. It's putting it out there now, as a generic sample letter, so that companies can consider it before actually filing a prospectus and trying to do a deal.[1] It's funny! Basically it's eight comments to the effect of "your stock price is stupid; please inform investors that your stock price is stupid." Here's what the SEC wants on the cover page of any meme-stock prospectus: Describe the recent price volatility in your stock and briefly disclose any known risks of investing in your stock under these circumstances. Add, for comparison purposes, disclosure of the market price of your common stock prior to the recent price volatility in your stock. For example, disclose the price at which your stock was trading XX days prior to your filing. Describe any recent change in your financial condition or results of operations, such as your earnings, revenues or other measure of company value that is consistent with the recent change in your stock price. If no such change to your financial condition or results of operations exists, disclose that fact.
That is, if your stock is up 500% in a week and nothing has changed about your business, you have to say, on the first page, "Our stock is up 500% in a week and nothing has changed about our business." You don't technically have to add, "which is stupid and you shouldn't buy it," but that is implied. I mean, you and I and the SEC will pick up that implication. I don't know if the intended readers of this warning will. It goes on to ask for risk factors about "the recent extreme volatility in your stock price," "the effects of a potential 'short squeeze' due to a sudden increase in demand for your stock," the effect on the stock price of the offering itself, and, if the company expects to do more offerings later (because it needs a lot of cash), "the dilutive impact of those offerings on investors that purchase shares in this offering at a significantly higher price." (That is: "If you buy stock now at stupid prices, and we sell more stock later at normal prices, you will feel especially stupid.") Here's the thing. If you are a meme-stock issuer looking to raise money in a retail frenzy, you are going to do an at-the-market offering: Instead of selling stock at a fixed price at the end of the day to a bunch of institutions, as you would in a classic book-built offering, in an ATM you just hire a bank to sell shares quietly into the market during the course of one or more days, to whoever wants to buy the shares on the exchange, at whatever the market price is. The reason you are doing this is that the people buying all the stock—the people frantically bidding your stock up to stupid prices all day—are retail investors from Reddit. You want your offering to go to the redditors buying two shares at a time, not big institutions, because the redditors will pay much higher prices. And the way to reach them is in ordinary brokerage transactions, selling shares throughout the day on the exchange.[2] This is obvious; this is how AMC raised money, how Tesla Inc. does, how Hertz Global Holdings Inc. tried to raise money last June when it was simultaneously bankrupt and a meme darling. In an ATM offering, nobody is reading the prospectus. In a regular book-built offering, there is a prospectus, and you send it to everyone who might buy, and they are professional investors so they might even skim it a little. In an ATM offering, you sell stock on the exchange, and people buy it on the exchange. You don't know who you're selling to, and they don't know who they're buying from. One day they are enthusiastically buying stock, on the exchange, from other people who own it and want to sell it. The next day they are enthusiastically buying stock, on the exchange, from you, without noticing the transition. There is no practical way to slap a warning label on the stock. You slap a warning label on the prospectus, you put the prospectus on the SEC website, everyone is in some notional way warned, but the enthusiasm that caused your stock price to increase also ensures that no one will actually read the warning. As I wrote about Hertz: "As a formality, there was a prospectus on the SEC website saying 'haha you fools do not buy this,' but that had nothing really to do with the stock sale." Conversely, with most of the meme stocks, everyone buying them seemed to be aware that everything was stupid anyway? It is easy enough to imagine a world where a stock goes up 500% in a week, retail investors look at it and say "hey that company must have announced some big good news," and they buy the stock. In that world, saying "our stock is up 500% but we have announced no news, it's all just silly" would be helpful, I guess, if you could find a way to say it to the retail investors. In the actual meme-stock world of the last few weeks, though, nobody seemed all that deceived. There were not a lot of breathless Reddit discussions of corporate news; the discussions were about holding and short squeezes. Also this was all in the news constantly, and not as, like, "wow GameStop stores are really doing well." People knew that, whatever they were getting into, it wasn't about the businesses of the underlying companies. The whole thing … I am not exactly sure it is a problem, or what the problem is, but if it is a problem, it is a problem that is hard to address with traditional disclosure regulation, hard even to comprehend for traditional disclosure regulators. I quoted this yesterday, but it remains a good succinct summary of the situation: One of the core principles of market regulation in the U.S. is transparency—give investors information and let them decide. The GameStop drama was nothing if not transparent. "You can sell garbage to the public as long as you say to the public, 'This is garbage and you'd be an idiot to buy it, but would you like to buy it?'" said Harvey Pitt, a former SEC chairman. What appears to have happened in recent weeks is that a massive wave of retail investors answered, "Yes," to that question, current and former policy makers say.
The SEC here, in its hypothetical response to a hypothetical meme-stock prospectus, wants to make sure that companies say "this is garbage and you'd be an idiot to buy it" in the proper font and in sufficient detail, because that is what the SEC does. I am not sure it matters here. Reddit knowsWhen everyone is talking about you, raise money: Reddit Inc. doubled its valuation to $6 billion in a new round of funding that comes as the social-media company has added users through the Covid-19 pandemic and more recently has gained attention for its role in the recent Wall Street trading frenzy. Reddit on Monday said it raised $250 million in a late-stage funding round led by venture-capital firm Vy Capital. Previously it was valued at $3 billion after its last funding round in February 2019, according to PitchBook, a provider of private-market data. Current investors in Reddit also include venture-capital firm Andreessen Horowitz and internet conglomerate Tencent Holdings Ltd.
Obviously social media companies tend to be valued on the size and growth of their user base, but Reddit's recent adventures also point to possible new monetization models. When Reddit was worth $3 billion in 2019, it had however many users, and there was some model for how it could make money by selling ads and data and so forth. Now it has more users, but also it has demonstrated those users' ability to control the global financial system, at least for a bit. That … you can probably make money with that? Not just by selling ads? I don't have any great ideas, but if Reddit offered a fast direct feed of its posts to hedge funds and high-frequency traders, maybe they'd pay for it? Or, I don't know, if you wanted Reddit to algorithmically promote posts touting a particular stock, maybe that would be something you'd pay a lot of money for? There is a general view in finance that sitting at the center of a lot of order flow is valuable in itself, that it gives you information and clout that you can turn into money. That roughly describes Goldman Sachs Group Inc.'s business model, or Citadel Securities'. Why not Reddit too? Tesla Bitcoin Reddit Apple etc.Man, I have no idea about this, but here's a post from Jan. 2 on Reddit's r/Bitcoin subreddit by a poster named "u/TSLAinsider," with the title "You heard it here first - our Company just bought 800 Million worth of Bitcoin": I am a software dev working at R&D at Tesla in California, over the past 72 hours our company bought 24701 BTC at an average price of 33142$. The way we did it was buying small amounts of BTC every few seconds and big amounts of BTC after a dip of atleast 1.5%. We did this with a bot, which we developed with Python and NodeJs. I have no idea what will happen once this reaches the newspapers but I think the price will explode even more. Thank me later.
For all I know this was completely fake, but on the other hand yesterday Tesla did announce that it had bought $1.5 billion of Bitcoin in January, and the price did explode even more. "I TOLD YOU SO," TSLAinsider posted yesterday. If you know that your employer is buying Bitcoin, can you legally buy Bitcoin, or tip your friends? This isn't legal advice, and there might be good legal reasons not to; you might be violating your employment agreement or a nondisclosure agreement or giving away trade secrets or whatever. If your employer is, say, a Bitcoin brokerage, you might be doing some sort of market-fraud-y thing, front-running or whatever. On the other hand I don't think you are exactly insider trading, because (1) Bitcoin isn't a security and (2) you have no inside information about Bitcoin. People buy Bitcoin, people sell Bitcoin, there are a lot of trades; knowing that someone is buying does not necessarily give you an unfair advantage. But if you are pretty sure that your employer's purchases of Bitcoin are going to cause the price to "explode," because your employer is big and famous and can provide a huge vote of confidence in Bitcoin as a corporate asset, then, I don't know, it feels worse, sure. I don't think we're especially far along in developing a sophisticated law of Bitcoin insider trading, though. Elsewhere here's a pitch: Apple Inc. should follow in Tesla Inc.'s footsteps, but by getting into cryptocurrencies, not electric vehicles, according to RBC Capital Markets. The iPhone maker could create a sizable new market for growth if it were to develop its Apple Wallet into a crypto exchange, said analyst Mitch Steves. "The wallet initiative appears to be a clear multi-billion dollar opportunity for the firm (potential for well over $40 billion in annual revenue with limited R&D)," Steves wrote in a note to clients.
Okay sure whatever. Here's my advice to Apple, though: If you are going to announce that Apple Wallet will now be a crypto exchange, you should buy Bitcoins first. Apple has close to $200 billion of cash and marketable securities; you gotta put at least tens of billions of dollars into Bitcoin. Then you put out a press release like "we've thought about it for a while and it's the official position of Apple that Bitcoin is the good money now, everyone should use Bitcoin." Then the price of Bitcoin like … really really really predictably doubles immediately? Then you could sell some of your holdings for a huge easy profit, though you might want to hang on to some of them for when the next giant company does this and it doubles again. I should never be allowed near a public company; isn't financial engineering so much more fun than, like, making phones? This is basically the trade that Tesla did, as we discussed yesterday: It bought a bunch of Bitcoins, it announced "hey Bitcoin is good now, we own Bitcoins, maybe one day you can use them to buy Teslas or whatever," and the price of Bitcoin very predictably shot up because the world's richest person, and his very popular car company, had given it their stamp of approval. But Elon Musk was already an obviously extremely Bitcoiny guy, so "Elon Musk likes Bitcoin now" was not particularly surprising news for Bitcoin's price. If Apple announced it was into Bitcoin, that would be much more surprising, and likely do even more for the price. Other companies. Alphabet Inc., sure, "we are looking into letting people pay for online ads with Bitcoins, and in the meantime we have bought a ton of them." Obviously banks. JPMorgan Chase & Co. should buy billions of dollars' worth of Bitcoins and put Jamie Dimon out there to say "I was wrong about Bitcoin, I love it now, we are going to look into building the financial infrastructure of the future for Bitcoin." And then, you know, you look into it or whatever, and meanwhile the price of Bitcoin jumps and you sell down your holdings. You don't have to do much; Tesla's not accepting Bitcoin for cars today. Just say you'll look into it and the price will go up. Basically we are in a time, for Bitcoin, where mainstream acceptance is the obvious catalyst to drive the price higher: Michael Novogratz, the founder of cryptocurrency investment firm Galaxy Digital, sees Bitcoin more than doubling to $100,000 by the end of the year, spurred higher as more companies allow customers to use the token to make purchases. ... "You're going to see every company in America do the same thing," Novogratz said Monday in a Bloomberg Television interview. Between corporations adding Bitcoin to treasury funds and the city of Miami also considering adding the cryptocurrency to its balance sheet, "It doesn't have to be a lot. It's the messaging that matters, you're seeing the herd here, and it's coming."
If you are in a position to provide that mainstream acceptance—if you are a giant normal mainstream company whose acceptance of Bitcoin would be big news—then you are in a position to profit from it. How's GameStop doing?GameStop Corp. (GME) common stock closed at $60 yesterday, down 5.9%, on its lightest volume in almost four weeks. At that price it is up almost 220% year-to-date. It should probably sell some stock, huh? As of 11 a.m. today it was down, though, trading at around $49. Gotta move quick! Meme ETFSure why not: Asset manager VanEck is aiming to capitalize on social-media chatter centered around stocks by launching a social sentiment exchange-traded fund, according to a report by the Financial Times. The VanEck Vectors Social Sentiment ETF will invest in stocks that most people are talking up on social media sites, with the Buzz NextGen AI US Sentiment Leaders Index to serve as the underlying index, the FT reported Monday.
The FT explains: The Buzz index aggregates investment-related content from social media sites such as Twitter and StockTwits, blogs and news articles. Machine learning and artificial intelligence are then deployed to attempt to "identify patterns, trends and changing sentiment which can affect market-based outcomes".
Here is the guy who created the index: Wise, whose firm manages $1.2bn in long/short hedge funds, said he created the index because he "really wanted to know what people were saying [online] and thought there has to be some value in that. "For many years and even generations we have known that sentiment drives markets. The problem was that we could never measure it," he added.
Well, now we can measure something. I'm sure this thing is fine as far as it goes, but I want dumber indexes. Last week I suggested an ETF of the 50 stocks that Robinhood briefly refused to trade because they were too volatile and meme-y, a static index not of "here's what people are talking about today" but rather "here are all the stocks that blew up in January." Or I want an ETF of stocks that are mentioned most often on Reddit near the words "short squeeze" or "gamma squeeze." The story of the last few weeks is not that sentiment drives markets; it's that memes and vengeance and online forums explaining the technical features of options hedging drive markets. You want to exploit that directly. A SPAC rap"Never do corporate parody rap videos," is my number one rule around here, but this is not technically a corporate parody rap video, it's a SPAC parody rap video? Is it even a parody? I don't know. I laughed. Bill Ackman tweeted it. I have no real problem with this. A SoftBank earnings presentationOn the other hand nothing in financial comedy can compare to SoftBank Group Corp.'s quarterly earnings presentations. Here's yesterday's. "What is SoftBank Group?," asks the first slide, in approximately three different fonts. The second slide is just a picture of a goose. You know you are in good hands, at that point. "Yes, this is the stuff," you say to yourself, looking at that goose. The third slide says "Consolidated Results," in a fourth font. The succeeding slides are charts of financial results. Then there is a merger case study. You wait patiently. The goose comes back on the 15th slide. "SoftBank Group = Producer of golden eggs," it says. Your wait has paid off. The next slide is the same except now the goose has a little pink sign saying "Information Revolution" tied around its neck. The following slide has the same goose, but now there are five golden eggs with little flags in them, saying "Alibaba Group," "Yahoo! Japan" and other big SoftBank wins. Then there are a bunch of slides charting the golden eggs by year, like, bar charts, only instead of bars there are stacks of golden eggs. It is extremely goosey. I am not sure it is even in the top 10 funniest SoftBank presentations, but it might be funnier than any earnings presentation that any other company has ever done?[3] Things happenU.S. Junk-Bond Yields Drop Below 4% for the First Time Ever. Robinhood Faces Wrongful-Death Lawsuit Over Young Trader's Suicide. Biggest U.S. Banks Keep Lending Less and Less of Their Money. Endless Boom in Blank Check Companies Is Wearing Out Insurers. Boeing Board Failed to Challenge CEO on 737 MAX Safety, Lawsuit Says. Redditors' Plan to Use GameStop Playbook for Glove Makers Unravels. Why Would Passive Funds Invest in Corporate Governance? Angry Robinhood Traders Take Aim at the Wrong Robin Hood. A 104-year-old man in Colombia credits the COVID-19 lockdown for helping him finally complete his dissertation. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] There is an important securities-law reason for this. A classic function of the SEC is that a company files a prospectus to sell stock—in an initial public offering, for instance—and then the SEC has some time to review the prospectus. The SEC sends back comments, the company responds to the comments, they go back and forth, eventually the SEC has no further comments, the prospectus is effective, and the IPO is launched. But for most biggish longstanding public companies, the process doesn't work that way: They have an existing "shelf registration statement" that allows them to raise money with a new "prospectus supplement" without further SEC review, or they can file an "automatically effective registration statement" without any pre-effectiveness SEC review. So when an existing public company (like AMC) decides to do an ATM offering during a meme-stock frenzy, the SEC mostly *doesn't get to send them this letter*: It can't hold up the deal; it can only complain after the fact. So the SEC puts out the sample letter as a warning: If you are in this situation and don't take the sample letter's advice, you are on notice that the SEC will come after you. "The Division urges companies to take these sample comments into consideration as they prepare disclosure documents that may not typically be subject to review by the Division before their use, such as automatically effective registration statements and prospectus supplements for takedowns from existing shelf registration statements," says the SEC in its introduction to the letter. [2] Careful students of market microstructure will note that retail investors largely don't trade on the exchange but get internalized. Still. The basic mechanism is "high-frequency traders buy at the bid from the issuer on the exchange, then sell to retail at (or inside) the offer via internalization." [3] I have not done any sort of comprehensive survey, but the nice thing about writing a completely unsupported superlative like this is that people will email me all the funnier earnings presentations. This is a well-known internet phenomenon: The best way to get the right answer is not to ask a question, but to confidently assert the wrong answer. Here however I am less interested in the factual accuracy or inaccuracy of the statement than I am in, you know, reading funny earnings presentations. | 
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