CoupangWe talked last week about the initial public offering of Coupang Inc., which priced on Wednesday evening at $35 per share. On Thursday, its first day of trading, it opened at $69 per share, almost twice the IPO price, and closed at $49.25. (It closed yesterday at $50.45.) That's a first-day "IPO pop" of about 40%, which is not unusual for this very hot IPO market. What was unusual about the Coupang IPO was the allocation of shares. Bloomberg's Crystal Tse reported: Coupang Inc. handpicked fewer than 100 investors to participate in its $4.6 billion initial public offering, a rare move that shut out many potential shareholders from the year's largest U.S. listing, people familiar with the matter said. The South Korean e-commerce company allocated the top 25 investors about 80% of the deal, a higher proportion than most IPOs, according to the people. An unusually large amount of investors who put in orders weren't allocated any stock, the people said, asking not to be identified because the information is private. … The company sold some of the shares to investors who were existing backers of the company, the people said. Coupang and its management played an outsized role in choosing which funds were let into the deal, according to the people.
I pointed out that this sort of allocation — to a small number of investors, chosen by Coupang, focused on existing investors and "friends and family" — means that Coupang got to choose who benefited from the IPO pop. Instead of selling stock to the usual crowd of big Wall Street investors, and letting them profit from the likely post-IPO rise in the stock price, Coupang sold stock to the people it liked, and let them profit. I also suggested something that I should make more explicit, which is: If you do this, you should expect a big IPO pop. Instead of selling shares to everyone who wanted them, at whatever price cleared the market, Coupang kept the supply limited and zeroed a lot of big investors who put in the work to understand the company and decided that they wanted to buy. Presumably that meant it had to underprice the stock, in order to sell all of it to a select group of investors rather than anyone who wanted it. And presumably many of the investors who were zeroed still wanted to buy, so they went into the market last week (or will go into the market this week, etc.) to buy stock. By marketing the IPO widely to big investors and getting a lot of hype and interest, and then not selling any stock to those investors, Coupang was able to create predictable demand for its stock in the days after the IPO. We talk a lot about IPO pops. There is a popular criticism, particularly from venture capitalists, that they are bad for companies, that a company that has a big IPO pop has "left money on the table." The market-clearing price for Coupang's stock was $69 or $49.25 or whatever, so it was a mistake for Coupang to sell stock at $35. But Coupang did this very consciously; it could have sold stock to a bigger group of investors at a higher price, and instead chose to sell stock to a smaller group of investors at a lower price, basically ensuring a bigger IPO pop. Why? Here's something else that's a little unusual about Coupang's IPO. Like most IPOs, this one comes with a lockup; the company, its employees and big existing investors can't sell their stock for 180 days after the IPO. Lockups are standard in U.S. IPOs, and the usual justification is that a buyer in an IPO doesn't want the company to turn around and sell more stock the next week, for simple supply and demand reasons. In the IPO, the company sells a large chunk of stock to new investors; those investors don't want another large chunk to come free and depress the price of the stock. So the company effectively promises that the IPO is the last stock buyers will see from the company or its insiders for six months; there'll be no new supply for a while, creating a scarcity value. But Coupang's lockup has some important exceptions. For instance, non-executive employees of the company can sell their stock just six trading days after the IPO (this Thursday), as long as the stock closes at $35 or above on the third day of trading (yesterday — it did). Big existing investors who sold in the IPO (other than the founder, Bom Kim) can sell up to one-third of their stock starting 12 days after the IPO, as long as the stock closes at $46.55 (33% above the IPO price) or above consistently over the first 10 days. (So far, so good.) There are other possible early lockup releases based on earnings reports, but the basic point is that if the stock trades well, the lockups end early. This makes sense, and Coupang is not the first company to build in an automatic early lockup release if the stock trades well. The idea is that the lockup is designed to protect the IPO investors from a flood of supply that will drive down the price of their shares. But if their shares trade up, the IPO investors are fine; the risk they took buying newly public stock paid off, and they have nothing really to complain about if people sell more. But this combines in an interesting way with Coupang's tight allocation. Basically the deal is: - The company sells stock in the IPO at a price that is too low.
- It hand-picks the buyers of that stock, with some of them being existing investors, so that its favored investors get the benefit of buying underpriced stock.
- Because the stock is underpriced, it trades up, which allows Coupang's existing investors and employees to sell more stock shortly after the IPO instead of waiting for a six-month lockup to expire.
- Because the stock is trading up and because many big potential investors got zero IPO allocations, there is a lot of demand for the stock that Coupang's existing investors and employees have to sell.
So this is a way to do an IPO with a big pop, but where the company very clearly does not regret it. The beneficiaries of the pop are the people the company wants to benefit: buyers it chose in the IPO, but also insiders who want to sell after the IPO. They get to sell quickly (because the lockup vanishes), and at a good price (because lots of people who wanted to buy in the IPO couldn't and so have to buy stock in the secondary market). The popular defense of the IPO pop is that the IPO is not a one-shot transaction. Companies do not do an IPO to raise as much money as possible at the best possible price; they do an IPO as the first move in a long, mutually beneficial relationship with the public markets. A company that does an IPO may come back to raise money again in a year or two; in any case, its pre-IPO investors — founders and employees and venture capitalists — have stock that they will want to sell after the IPO. They will want those sales to be done at a good price; the price of the IPO is less important than the insiders' ability to sell stock at good prices in the future. Having a big IPO pop is one way to optimize for that — investors like big pops and will be fond of a company if its stock goes up — but it's kind of crude; the market's memory is short, and no one will care that much about your IPO pop when you sell stock six months later. Even better is to have a big IPO pop and use it to immediately unlock further sales. We talk a lot about alternatives to the IPO, direct listings and special purpose acquisition companies, which are meant to give companies what they want rather than forcing them into traditional IPO structures. My view is that companies can often get what they want within the traditional IPO, just by demanding it. Coupang did. Maybe that's the future of the IPO. GriddyThe model of a lot of electric companies is that they buy electricity in the wholesale market at variable rates, and sell it to retail customers at fixed rates. That seems risky? If wholesale rates go up a lot, you are stuck paying high prices for electricity and selling at lower prices. The price risk is entirely on the power provider. Meanwhile Griddy Energy LLC has an unusual, only-in-Texas model in which it buys electricity in the wholesale market at variable rates, sells it to retail customers at the same rates, and collects $9.99 per month in subscription fees: Most Texans pay for their electricity through fixed-rate utility plans that shield customers from volatility in wholesale markets. But Griddy pioneered a novel business model that charged customers $10 a month and passed wholesale prices directly to households, a plan that was made possible by Texas' uniquely deregulated market.
Naively you might think that this is a safer model, financially, for Griddy: Instead of taking wholesale-market price risk, as other providers do when they buy at variable prices and sell at fixed prices, Griddy buys and sells at exactly the same prices and just collects a free $9.99 per month. Well, no: Griddy Energy LLC filed for bankruptcy protection Monday with a plan to provide releases to former customers who were hit with hefty electricity bills during last month's extreme winter storm. The filing is the third bankruptcy arising from the cold freeze in Texas that left buyers of electricity facing massive invoices after the state grid operator, Electric Reliability Council of Texas, raised prices exponentially in an effort to get power generators to supply power amid widespread blackouts. "The actions of Ercot destroyed our business and caused financial harm to our customers," said Griddy Chief Executive Officer Michael Fallquist. The company's bankruptcy plan, if confirmed, would provide relief for former customers who were unable to pay their bills due to the unprecedented prices, he said.
Here's Griddy's press release, which emphasizes: Griddy did not profit from the winter storm crisis. Griddy provides customers access to real-time wholesale electricity prices, allowing them to monitor and adjust electricity usage. Griddy neither influences nor controls the price of electricity; prices are passed on to customers without mark-up. Griddy only earns the same $9.99 monthly membership fee regardless of the fluctuations in price of electricity.
Perhaps the point here is that counterparty risk (and legal and reputational risk) is often a bigger deal than market risk. Griddy eliminated market risk from its model; it made the same $9.99 regardless of what happened to electricity prices, and passed the market risk on to its customers. But of course when market prices went haywire, the customers couldn't pay, and the prices became Griddy's problem again. Bad tweetsWell, sure: The Securities and Exchange Commission [yesterday] announced fraud charges and an asset freeze and other emergency relief against an Irvine, California-based trader who used social media to spread false information about a defunct company, while secretly profiting by selling his own holdings of the company's stock. According to the SEC's complaint, which was filed under seal in federal court in the Central District of California on March 2, 2021 and unsealed [yesterday], Andrew L. Fassari used the Twitter handle @OCMillionaire to tweet false statements about Arcis Resources Corporation (ARCS), a defunct Nevada company with publicly traded securities, during December 2020. Specifically, the complaint alleges that, on Dec. 9, 2020, Fassari began purchasing over 41 million shares of ARCS stock shortly before tweeting false information about ARCS to his thousands of Twitter followers, including falsely claiming that ARCS was reviving its operations, expanding its business, and being backed by "huge" investors. The complaint further alleges that, between Dec. 9 and 21, 2020, Fassari made approximately 120 tweets that referenced "$ARCS," dozens of which were false and misleading. For example, he tweeted, "$ARCS 380,000 indoor cultivation 1 Million+ sq ft processing. WEEEEEEEEE This CEO has big plans for us" and "a ton of news coming and backed by huge investors for its #cannabis operation[.]" In seeking an injunction, the SEC alleges that Fassari continued to tweet about other stocks as recently as January and February 2021. The complaint further alleges that, over the next several days, ARCS's share price skyrocketed, ultimately increasing over 4,000%. The complaint also alleges that Fassari made false statements about his own trading in ARCS. Between Dec. 10 and 16, 2020, Fassari allegedly sold all his shares in ARCS for profits of over $929,000, all while continuing to publish false and misleading information about ARCS and his trading in ARCS.
"Arcis Resources Corporation operates as a software company," says Bloomberg's DES page. Here is Arcis's most recent quarterly report on Form 10-Q, from November 2011, which says that the company "was incorporated in Nevada on March 27, 2008 under the name 'Mountain Renewables, Inc.,'" but that in 2010 it changed its name to Arcis Resources and got into "the business of acquiring, trading and distributing fuel oil and other petroleum products." Here is a Form 8-K from August 2012 announcing that Arcis sold some (all?) of its assets to another company, that its chief executive officer and chief operating officer had resigned, and that it had a new interim CEO who had previously been convicted of penny-stock fraud, super. He resigned in 2013. In 2015, Arcis terminated its registration with the SEC, and that's the last thing the SEC seems to have on Arcis. Now it trades on the "pink sheets," at OTC Markets, a place for trading stocks that can't make it to the stock exchange. Its last press release is from 2016: "Arcis Resources Corporation to launch vape store focused on Latin American market by 1st quarter of 2017." Now the SEC says: Arcis Resources Corporation ("ARCS") is a Nevada corporation that previously used an address in Denver, Colorado, and engaged in the cannabis business. … ARCS has not conducted business since approximately 2016.
So Arcis Resources is a software/renewables/oil-trading/vaping/cannabis, cannabis, always cannabis company, though it is also none of those things because it "has not conducted business since approximately 2016." Arcis Resources is whatever you want it to be, a blank screen on which you can project anything. You can tweet, for instance, that Arcis has discovered a lot of cannabis, or software, or oil, or vapes, or NFTs for that matter, and no one can be sure that you're wrong. It's a company that does nothing, and that has in the past done (or at least talked about doing) a little of everything, so anything is possible. Also you can say that the chief executive officer of Arcis has been emailing you about all the cannabis it has discovered, and no one can contradict you, because Arcis doesn't even have a CEO. And in fact Fassari allegedly did that: Using the handle @OCMillionaire, Fassari also falsely claimed on Twitter to be in direct contact with ARCS's CEO and to be receiving from the CEO information that ARCS's business was being revived. These false statements include: "$ARCS i will share what i have uncovered in the last 24 hours with you! Give me a few moments to load emails from the ceo on the big short squeeze that is coming! I just bought OOSs! WEEEEE[.]" .. ".0094 close enough .... Here is the 2nd email i received for this 1.4 million sq ft #cannabis behemoth. Big share reduction coming.#CannabisCommunity #Cannab1sNews … (This tweet included a picture of emails that purported to be to and from Arcis Resources Corporation from the email address info@arcisresourcescorp.com, two of which also included Raul Santos's name.)
Raul Santos seems to be the name of Arcis's last CEO. It's not the name of the last CEO to sign an Arcis SEC filing in 2015 (Eric LaChance), or of the last CEO to be announced in an SEC filing in 2013 (Darrell Peterson), or the guy before that (Robert DiMarco, the penny-stock-fraud one), or the guy before that (Kenneth Flatt). Or of yet another CEO, Chris Margait, named in a 2015 press release ("Arcis Resources Corporation to Develop Marijuana App With Cutting Edge Intellectual Property Called LinkNsmoke(TM) Available for iPhone/Android Phone"). But here is a quarterly report that Arcis filed with OTC Markets, the pink-sheet venue where its stock traded, in 2016, saying that Raul Santos replaced Chris Margait as CEO. That seems to be the last thing that OTC Markets has on Arcis, so, sure, he's the CEO. Just like Arcis is in every business and no business, everyone and no one is its CEO. Anyway the SEC says that neither Santos nor any other Arcis CEO was actually emailing Fassari. In fact, a former Arcis CEO (Santos?) was emailing OTC Markets and the SEC to get himself removed from the whole conversation. The SEC says: On or about December 14, 2020, the most recent Chief Executive Officer of ARCS (the "CEO") sent an email to OTC Markets and explained: "I have just become aware someone not affiliated with Arcis Resources corporation [sic] is spreading lies about Arcis Resources on Twitter/message boards claiming they have an affiliation to the company & spreading false lies. This has been a dormant shell for several years now & there is nothing is [sic] going on. What can I do to have my name removed from the OTC Markets? Additionally, what person from the OTC Markets can I talk to so investors are not harmed any further?" On or about February 23, 2021, the CEO emailed the staff of the SEC and explained, in part: "ARCS was a failed project. It has been inactive since approximately 2016. (no updated filings have been done with the OTC markets in years.)" and "The website: arcisresourcescorp.com (became available years ago due to non payment) As there was no need for it. At some point last year someone purchased it to spread false rumors about Arcis. In addition, someone also made up a fake Twitter account to make false statements on Twitter." and "I believe someone named OCmillionaire on [iHub] & Twitter with several thousands followers purchased shares in the open market with several of his associates. He then purchased the domain name/ made up a fake Twitter account in order to sell shares he had purchased at higher price."
A week later, the SEC sued Fassari and halted trading in Arcis. There's not much to say about Fassari; his alleged tweets seem to have been sort of garden-variety pump-and-dump stuff, and they're not even especially funny. The SEC says he made about $929,693 from trading Arcis. But why was he able to do that? This is a public company that has never done much but put out press releases; in both its last 10-Q (from 2011) and its last quarterly report to OTC Markets (from 2016), it reported quarterly revenues in the mid-five digits. Since that last 10-Q I count six CEOs, one of whom had a background in penny-stock fraud himself. What were they all doing? Arcis was pursuing an assortment of businesses, not particularly vigorously, and it ended up in one of the buzziest and most fraud-prone businesses, cannabis. (And cannabis vaping, and cannabis smartphone apps.) It is hard to shake the impression that Arcis has spent the last decade as a pure plaything for penny-stock gambling and scams. Leaving it to trade on the pink sheets does not serve much economic purpose; no capital was being allocated to any business by trading Arcis stock. It was just a stock-market tripping hazard, a thing lying around waiting for the next scammer to pump it up and extract from money. The SEC's suspension of trading in Arcis expires, by its terms, at 11:59 a.m. today. Meanwhile at the high endSo one way to do scams is to pick a defunct company, buy its stock for nothing, start tweeting that it's growing a lot of marijuana, and then sell its stock for something. Fine. You attract a certain class of victim for that scam, specifically, people who trade penny stocks on the pink sheets and hang out on Twitter. One way to do scams on a different class of victims is to pick a hot private company that is rumored to be going public soon, claim to own stock in that company, and offer to sell it. Actually selling it would be hard — private companies tend to have rules around how their stock can be traded — but that's okay, because modern private markets have developed sort of a norm of indirect investing in hot private companies. Some private vehicle buys a chunk of private-company stock (from the company or an existing big investor), and holds onto it, but sells shares in the vehicle to investors. As far as the private company knows it has one shareholder, the vehicle, but the vehicle itself has lots of shareholders, all of whom indirectly own shares in a pool of shares of the private company. This is an absolutely real thing, sometimes done by big reputable investment banks. But it's relatively easy to fake. If I sell you shares of Stripe Inc. stock, you might be tempted to call up Stripe and say "hey I'm a shareholder now" and Stripe might tell you "no you aren't, we have a list right here" and I'd get caught. (Or you might do this before buying the stock, for instance to check if Stripe has transfer restrictions on its stock, and then you would find out the truth and not buy from me.) But if I say "I have a pot of Stripe shares over here, would you like to give me money in exchange for an ownership interest in the pot," that's no problem. Stripe is not involved, by design, and I can give you a nice certificate that really does entitle you to an ownership interest in the pot. You might not notice that the pot is empty. And the class of victims here is very good: It's people who have millions of dollars to invest in private companies, who want to invest in the best and hottest private companies, but who do not have the hundreds of millions of dollars that they'd need to actually do that. And who are looking for a loophole, a way to get hot unicorn shares that are not actually available for purchase. They're rich and greedy, which makes for good victims. Shamoon Rafiq allegedly knows: A man who was previously convicted of fraudulently selling pre-initial public offering shares in Google Inc. is facing new charges that he conducted a similar scam while posing as representatives of a billionaire family office. Shamoon Rafiq, 47, was charged Friday by federal prosecutors in Manhattan. According to the criminal complaint, Singapore resident Rafiq impersonated two senior officials of the investment firm for a "prominent billionaire family," falsely claiming to have access to pre-IPO shares in Airbnb Inc. and other companies. … According to the complaint, Rafiq used his claimed association with the family to solicit funds from other investment firms, with one New York company and its overseas subsidiary wiring him $9 million in August. He created a fake website for the family office and fake emails for the two officials as part of the scheme. "Shamoon Rafiq exploited investors' fear of missing out on the potential gains to be earned from investing in companies before they go public, and solicited millions of dollars from investors through brazen lies and deception," Manhattan U.S. Attorney Audrey Strauss said in a statement.
Here is the Justice Department announcement. This scam was so good that, even after spending more than three years in prison for running it on Google, he allegedly ran it again on Airbnb. And it came so close to working. According to the complaint, he got the "New York company" to wire $9 million for the shares-in-Airbnb-shares, but into escrow; the victim somewhat fortuitously caught on to the trick before the money was released from escrow, and seems to have gotten it back. A partner in the New York firm "participated in a call with a professional associate at a competitor firm," who told him that the other firm had considered doing a similar deal with Rafiq but discovered he was a serial scammer. The New York firm did a little more diligence, discovered the same, and went into sting mode: "On or about August 15, 2020, the New York Firm and Escrow Agent decided to continue communicating with 'Omar Rafiq' as though the New York Firm and the Client still intended to proceed with the Alleged Airbnb Transaction, in order to collect evidence that would be useful for law enforcement." If you can't get some hot private-company shares, at least you can play detective to catch the guy who tried to scam you. Not that they exactly caught him, though; "RAFIQ remains at large." The way to do this scam is from a foreign country, without ever meeting your victims. Things happenCredit Suisse Warns Greensill May Spoil Best Start in Decade. Credit Suisse's Greensill Funds Strayed From Tame Invoice Loans. Greensill financed Gupta based on invoices from 'friends of Sanjeev.' Junk-Loan Rally Cuts Company Borrowing Costs. Treasury sell-off sweeps in to US corporate bond market. Vice, BuzzFeed Facing Valuation Cuts in SPAC Deals. Tesla's 'Technoking' Musk Joins Long Line of Odd Job Titles. "Get well-written AI-generated rejection emails that reduce your writing time by 95% so you can focus on the things you love." Ea-Nasir Simpsons memes. Assistant principal in Florida arrested for rigging homecoming queen election. 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! | 
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