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Decentralization is the current trend in the global financial market. However, it's far from the only innovation the industry has seen lately. As companies want to accelerate their fundraising, these companies have innovated to open their businesses to public investment.
This can be achieved in a number of ways. You may remember Bill Ackerman's $ 4 billion blank check company, which was formed to buy a company yet to be named. There is also news about Softbank's planned Shell company in the US.
Such shell companies are often used as dedicated investment vehicles as part of a company's strategy to reduce financial risk or to improve the efficiency of certain financial activities. For one, using a reverse merger system with a public Shell company can save millions in subscription and listing fees and shorten the time it takes for a company to go public.
Kings of shells
Ackerman or Softbank's strategy isn't exactly new. In the late 1990s, Aaron Tsai, chief capitalist at MAS Capital, Inc., used public shell companies as a strategy to get companies public in less time and at less cost than a regular IPO. Tsai founded 101 Shell companies, took advantage of the trend, and became a multimillionaire at the age of 29.
Tsai has been described by the Wall Street Journal as a businessman "at the forefront of the resurgence of blank check or shell companies". Not many believed that building a business model out of companies with very few assets and little income, products, business, or a long-term plan was a good idea. But Tsai saw profitability in dealing with these "companies in business, doing nothing".
Shell companies weren't a new idea when Tsai saw the potential to make millions with them. However, there was renewed interest in these instruments due to the unexpected gains in the stock market in the 1990s, mainly due to internet-related offers. However, few discerning business people would have realized this value. Tsai was one of them.
Tsai used his public shell companies for reverse merger deals as an alternative strategy to subscribed IPOs. He merged his Shell companies with other companies in exchange for a portion of the outstanding shares in the merged company. This accelerated the initial public offering of these companies and resulted in significant income for Tsai as well.
This strategy not only helped his own business, but also benefited other companies who struggled to raise capital during the dot-com era. Even before 2000, Tsai saw the internet's potential as a tool for making investments successful. "We believe that the Internet will open up the stock markets to individual investors, create alternative stock trading systems for them, and thereby change the current model of capital formation," Tsai said in his Journal interview.
Are Shell Companies Still Relevant?
The way Shell companies are used now may not be the same as it has been in the past. However, the core idea of the purpose of having these companies at least in the legal or legitimate sense remains unchanged.
In a way, they've evolved into something with a less vague connotation: Special Purpose Acquisition Companies (SPACs). A recent report shows how SPACs were booming and likely to do even better in the year ahead. In 2020, the SPACs were between 200 and 194 more numerous than the traditional IPO deals. Interestingly, SPACs and traditional IPOs raised almost the same amounts of accumulated capital. Companies that listed SPACs raised a total of $ 64 billion, while subscribed IPOs generated $ 67 billion.
Paul Dellaquila, head of the SPAC ETF Defiance Next Gen, says that SPACs will only gain importance in 2021, as many big names are already behind them. The entry of Virgin Galactic and DraftKings, for example, gives SPACs more credibility. Dellaquila adds that sports teams may decide to go public too, and SPACs will be their likely vehicle for doing so.
In addition, a recent forecast by Goldman Sachs shows a rosy outlook for blank check companies that a surge in those companies in 2021-2022 could result in mergers and acquisitions valued at $ 300 billion, still a live round in its Be ammunition supply. His findings on blank check companies are useful in light of the proliferation of SPACs. According to BTIG, there are currently more than 200 SPACs seeking acquisitions over the next 18 to 24 month period.
Promote decentralized financing
Even before 2000, Tsai recognized the potential of the Internet to become a tool for making investments successful. "We believe that the Internet will open up the stock markets to individual investors, create alternative stock trading systems for them, and thereby change today's model of capital formation," Tsai added to the Journal.
As a result, Tsai already had the idea of decentralized financing in mind. It envisaged the concept that individual and institutional investors should take advantage of different investment opportunities in different parts of the world. He didn't see the advent of blockchain, smart contracts, FinTech, and decentralized finance, but he knew that one day everyone would be able to participate in investments across the world via the internet.
When blockchain and digital token offerings caused disruption across industries in the second half of the 2010s, Tsai once again demonstrated his resilience, versatility, and ingenuity. The relentless capitalist learned to adapt and research new technologies and business models.
This is how the MAS Capital Group, Inc. was founded. This new company is a financial advisory firm led by financial professionals based in Asia. This marks Tsai's foray into decentralized financing. He began testing new waters and again demonstrated his talent for innovation.
Tsai saw billions of dollars in digital currency flow into Initial Coin Offerings (ICOs). At the same time, he observed the loophole in the way investors performed due diligence in securing capital. This new business landscape inspired the creation of new services which led to the creation of MASEx.
MASEx has been in operation for more than a year and the company plans to grow further by bringing emerging markets into the market through an AI-powered decentralized platform. The company plans to expand its STO ecosystems to allow non-banks and under-banks to participate in investment opportunities.
Tsai saw how STOs will be part of the new normal in investing and raising capital, especially in Asia. "As we enter a new decade, don't be surprised at the world's largest STO exchange based in Asia or China."
To be clear, his message was not a reprimand to traditional financial institutions, but a challenge for everyone to improve if they want to stay in control or take on the dominant role in the global financial industry.
The need for regulation in decentralization
Despite all the promised benefits of decentralization, there are still crucial challenges. In STOs in particular, there are stumbling blocks that prevent companies and exchanges from achieving optimal results. Tsai points to regulatory compliance as the main challenge, specifically the implications for due diligence and regulatory controls.
“We are experiencing a seismic shift that spans the entire financial industry. This will disrupt the existing oligopoly of financial institutions in the areas of banking, securities and fund management. Regulators must face the opportunity, "Tsai said during a keynote address in 2019.
It may seem counterintuitive, but the MASEx founder and DeFi advocate is calling for urgent regulation of STOs, which are inherently decentralized. He describes the spirit and letter of US securities laws as in need of refreshment. They are inconsistent with the disruptively accelerating trend of digital currency adoption, financial decentralization, and self-regulated security token offerings.
DeFi companies often find themselves confronted with regulations that limit their options. At the same time, they find it problematic when there are no regulations to assure customers, investors or traders that the digital assets they get from a decentralized financial market have real value.
Defy obstacles with DeFi
Decentralized platforms go beyond geography, although partnerships with key industry players are critical to achieving trust and traction.
Technology has proven time and again that innovations can identify trends that enable success. It can also help companies around the world in their attempts to raise funding through the IPO.
Regulatory requirements make it difficult for many companies to be listed on the stock exchange. With STOs and even with the innovative business model with Shell companies, the long and drawn-out process of raising capital can be reduced significantly.
However, it is also important to consider regulation. Decentralization has numerous advantages, but without regulation to provide security for investors and consumers, it will be difficult to get investors to trust new financial services and security classes. Regulation and compliance build trust, and this may be exactly what DeFi needs to break into the financial world.