Written by: Lawyer Liu Honglin
MicroStrategy, a U.S. company known for providing business intelligence and mobile software solutions, has attracted attention in recent years due to its aggressive investments in the Bitcoin market. Since it began purchasing large amounts of Bitcoin in 2020, its stock price has risen by approximately 20 times. On October 30, 2024, MicroStrategy announced the so-called '21/21 Plan', intending to raise $21 billion in equity financing and $21 billion in bond issuance over the next three years, totaling $42 billion to purchase more Bitcoin. MicroStrategy's financing strategy for Bitcoin purchases has not only made it famous in the cryptocurrency field but has also sparked widespread discussion in the market regarding its investment strategy, risk management, and future prospects.
Source of the figure: MicroStrategy official website
In this article, Lawyer Mankun will dissect the wealth code behind MicroStrategy's financing for Bitcoin purchases and analyze from the perspective of Chinese domestic and overseas-listed enterprises whether it is possible to recreate an Asian version of MicroStrategy.
MicroStrategy's 'Wealth Code': A Comprehensive Analysis of Financing Strategies for Bitcoin Purchases
Analysis of MicroStrategy's Financing Channels
In August 2020, under the leadership of Chairman Michael Saylor, MicroStrategy boldly invested $250 million to purchase approximately 21,400 Bitcoins, becoming the first publicly traded company in the world to incorporate Bitcoin into its capital strategy. Since then, MicroStrategy has surged on the Bitcoin wave, continuously increasing its Bitcoin holdings through funds obtained from bond issuance and other financing means, and currently holds more than 420,000 Bitcoins. This strategy has allowed MicroStrategy to achieve significant investment returns when Bitcoin prices rise.
According to Lawyer Mankun's observations and analysis, MicroStrategy has adopted a 'diversification' strategy in its financing efforts, raising funds not only through bond issuance but also cleverly using various means such as equity financing and bank loans to 'build up' its Bitcoin investment plan.
Bond Financing
MicroStrategy primarily raises funds through the issuance of convertible bonds, convertible preferred notes, and senior secured bonds specifically for purchasing Bitcoin, with the most frequently used financing method being convertible bonds. These debt instruments vary in interest rates and maturity dates, but their common purpose is to expand MicroStrategy's Bitcoin holdings.
Convertible Bonds: These are hybrid securities that allow bondholders to convert their bonds into common stock of the company at specified times. For example, in December 2020, MicroStrategy raised $650 million through the issuance of convertible bonds, which were entirely used to purchase Bitcoin.
Convertible Preferred Notes: This is a special type of debt instrument that grants the holder the right to convert the notes into the company's preferred shares at a future point in time. Preferred shares are a special type of stock that has priority over common shareholders in the event of the company's bankruptcy or liquidation. For example, in February 2021, MicroStrategy issued $900 million in convertible preferred notes, with the proceeds used to purchase Bitcoin.
Senior Secured Notes: These are secured by the company's assets and have a high priority in the company's debt structure. In the event of bankruptcy or liquidation, holders of senior secured notes will be repaid before other unsecured creditors. For example, in June 2021, MicroStrategy completed a $500 million issuance of senior secured notes, with the proceeds also used to purchase Bitcoin.
Equity Financing
Equity financing, that is, the company raises funds by issuing additional stocks, is one of MicroStrategy's important 'treasures'. The company sells Class A common stock, drawing continuous 'fresh water' from the 'fund pool' of the capital market, and invests the funds significantly into Bitcoin purchases. For example, in August 2021, MicroStrategy raised funds by selling $900 million worth of common stock for purchasing Bitcoin.
MicroStrategy's practice of purchasing Bitcoin through common stock sales has formed a unique 'value dilution' logic, where although the company dilutes the rights of existing shareholders, the anticipated appreciation of Bitcoin leads the market to interpret this dilution as an increase in asset value, subsequently driving the company's stock price upward.
Bank Loans
MicroStrategy has also actively ventured into the lending field, using its Bitcoin holdings as collateral to boldly borrow funds from financial institutions. This 'borrowing to invest' strategy allows it to seize every investment opportunity in the volatile Bitcoin price market. When Bitcoin prices are favorable, timely borrowing to buy Bitcoin is like seizing the opportunity in the 'golden track' of the market, further expanding its Bitcoin asset scale. For instance, in September 2021, MicroStrategy obtained a loan of $205 million from Silvergate Bank, secured by some of the Bitcoins held by the company, to purchase more Bitcoin.
MicroStrategy's Stock-Currency-Debt Collaborative Strategy and Effectiveness
Thanks to the strategy of actively buying Bitcoin over the years, MicroStrategy's stock price has skyrocketed from $20 in 2020 to approximately 20 times that today. MicroStrategy's stock price has become an amplifier for Bitcoin prices, with its growth in recent years far exceeding that of Bitcoin. So why has MicroStrategy's financing strategy for Bitcoin purchases been so effective? We believe there are two main reasons:
Stock - Currency Collaborative Relationship:
MicroStrategy purchases Bitcoin through premium stock issuance, which helps to drive up Bitcoin prices. As Bitcoin prices rise, the company's net asset value and earnings will also increase accordingly, creating a positive feedback loop. Additionally, by financing Bitcoin purchases, the company's profit growth accelerates, and valuation multiples expand, which may lead to stock prices transitioning from linear growth to exponential growth, causing the market value and stock price increases to outpace the price rise of Bitcoin itself.
Stock - Bond Collaborative Relationship:
With the rise in market capitalization of MicroStrategy, the company gradually enters more stock indices, increasing the number and trading volume of derivative products, thereby lowering the financing costs of stocks and bonds. MicroStrategy's convertible bonds are uniquely designed, with the choice of stock conversion or cash repayment held by the company, which avoids the default problem caused by the inability to repay the convertible bonds at maturity. Bondholders either preserve their principal and earn interest, or after the bonds convert into MicroStrategy's stock, enjoy the rising stock prices. Essentially, these bonds become a 'debt-equity' tool friendly to stock prices and shareholders.
Recreating the Asian version of MicroStrategy: Possibilities and Challenges
Simply buying Bitcoin can lead to a 20-fold increase in stock prices. Seeing the enormous profits behind MicroStrategy's financing for Bitcoin purchases, some companies have begun to follow suit. Especially in the second half of this year, with the rise in cryptocurrency markets, listed companies have started large-scale purchases of Bitcoin.
As a law firm rooted in China focusing on web3.0, Lawyer Mankun aims to analyze whether Chinese listed enterprises can replicate MicroStrategy's success and create an Asian version of the MicroStrategy legend.
For listed companies in China, regardless of whether they issue bonds or increase stock issuance, if the financing purpose is to purchase Bitcoin, there will be compliance obstacles. According to relevant regulations such as the (Securities Law of the People's Republic of China) and the (Measures for the Administration of Issuance and Trading of Corporate Bonds), funds raised by companies through bond issuance or stock increase should be used for projects that comply with national macro-control policies and industrial policies, as well as for normal production and operation activities of the enterprise, and must not be used for non-productive expenditures. Therefore, financing by listed companies in mainland China to purchase Bitcoin faces significant regulatory difficulties.
Since domestic listed companies are not feasible, is it possible for overseas-listed Chinese enterprises? Currently, it appears that companies such as Boya Interactive, Meitu, Blue Ocean Interactive, and Nano Labs listed on the Hong Kong Stock Exchange or the NASDAQ have already spent heavily on purchasing Bitcoin. From public data, the funds used by these companies to purchase Bitcoin are all from their own reserves, and there are no cases of special financing in the capital markets for purchasing Bitcoin. So if they want to emulate MicroStrategy's financing for Bitcoin purchases in the capital market, is it feasible? Lawyer Mankun analyzes as follows:
1. Feasibility analysis of overseas-listed Chinese enterprises issuing bonds to buy Bitcoin
Foreign debt review and registration is a prerequisite
If Chinese enterprises want to issue bonds abroad, in addition to meeting local securities market bond issuance conditions and compliance requirements, the primary consideration is the foreign debt review and registration matters of the National Development and Reform Commission. However, since 2023, the National Development and Reform Commission has shown a tightening trend regarding foreign debt review and registration. On January 10, 2023, the National Development and Reform Commission released the (Management Measures for Enterprises' Medium and Long-term Foreign Debt Review and Registration) (National Development and Reform Commission Order No. 56, hereinafter referred to as the 'Measures for the Administration of Foreign Debt'), which took effect on February 10, replacing the previous normative documents mainly managing enterprises' borrowing of medium and long-term foreign debts (Notice of the National Development and Reform Commission on Promoting the Reform of the Registration System for Enterprises' Foreign Debt Issuance) (发改外资〔2015〕2044 号, hereinafter referred to as 'Document No. 2044'). During the era of Document No. 2044, the National Development and Reform Commission managed foreign debts of Chinese enterprises through a pre-registration approach, but the (Measures for the Administration of Foreign Debt) ended this situation, changing the foreign debt management to a pre-review registration. Without review and registration, borrowing foreign debt is not allowed. This also means that since February 10, 2023, overseas-listed Chinese enterprises will first need to obtain the National Development and Reform Commission's approval for foreign debt review and registration before borrowing medium and long-term foreign debts abroad.
Source of the figure: National Development and Reform Commission official website
Which foreign debts belong to medium and long-term foreign debts?
According to the (Measures for the Administration of Foreign Debt), medium and long-term foreign debt refers to debt instruments borrowed by Chinese enterprises from abroad for a period of more than 1 year (excluding 1 year), including but not limited to senior bonds, perpetual bonds, capital bonds, medium-term notes, convertible bonds, exchangeable bonds, financing leasing, and commercial loans. Therefore, if overseas-listed Chinese enterprises want to emulate MicroStrategy's bond financing and bank loan financing, as long as the term exceeds 1 year, it falls within the scope of foreign debt review and registration.
What restrictions are there on the use of foreign debt?
(Measures for the Administration of Foreign Debt) stipulations regarding the use of foreign debt mainly include the following points:
Article 7 stipulates that the use of foreign debt funds by enterprises should focus on their main business and contribute to the implementation of national major strategies and support the development of the real economy.
Article 8 stipulates that enterprises may independently decide to use foreign debt funds domestically or abroad based on their credit status and actual needs, and their uses should meet the following conditions:
（1） Does not violate China's laws and regulations;
（2） Does not threaten or harm China's national interests and economic, information data, and other security;
（3） Does not violate China's macroeconomic regulation goals;
（4） Does not violate our relevant development plans and industrial policies, does not create new implicit debts for local governments;
（5） Must not be used for speculation, hype, or other activities; except for banking financial enterprises, must not be lent to others, excluding situations where approval has been granted in the foreign debt review and registration application materials.
Article 25 stipulates that the actual use of funds raised from foreign debts by enterprises should be consistent with the content of the (Review and Registration Certificate) and must not be diverted to other uses.
Lawyer Mankun believes that the funds raised through bond issuance for purchasing Bitcoin are difficult to align with the relevant requirements of the (Measures for the Administration of Foreign Debt). On one hand, whether purchasing Bitcoin is focused on the main business and contributes to the development of the real economy is indeed questionable; on the other hand, financial regulatory authorities in mainland China have issued a series of strict control policies regarding virtual currencies, such as the (Notice on Further Preventing and Disposing of Risks of Virtual Currency Trading Speculation), which clearly states that activities related to virtual currencies are illegal financial activities, and participating in them poses legal risks, making relevant civil legal actions for investing in virtual currencies invalid. Therefore, based on the current policy tendencies of mainland regulatory authorities regarding Bitcoin, it is highly likely that the bond issuance for Bitcoin investment will be deemed by the National Development and Reform Commission as contrary to our macroeconomic regulation goals and industrial policies.
Can red-chip structures or VIE structures be exempted from foreign debt review and registration?
Seeing the above, many people may ask, can special structures be built to circumvent the foreign debt review and registration?
According to Lawyer Mankun's experience, during the era of Document No. 2044, there were differing views and opinions within the National Development and Reform Commission regarding whether bonds issued by overseas entities under red-chip or VIE structures should be registered. However, after the implementation of the (Measures for the Administration of Foreign Debt), this gray area has been closed, explicitly stating that domestic enterprises indirectly borrowing foreign debts abroad are also subject to these measures. Indirectly issuing bonds abroad refers to enterprises whose main business activities are in China issuing bonds or borrowing commercial loans in the name of registered overseas enterprises based on the equity, assets, revenues, or other similar rights of the domestic enterprise. Moreover, the National Development and Reform Commission has clarified on its official website that red-chip enterprises are also applicable. Therefore, under such a wide applicability, structures that may have previously circumvented foreign debt review and registration now need to be consulted with the National Development and Reform Commission on a case-by-case basis and obtain definitive opinions before determining legality and compliance.
In summary, Chinese overseas-listed companies face significant challenges in issuing medium and long-term foreign debt to purchase Bitcoin due to the foreign debt review and registration requirements by the National Development and Reform Commission. Therefore, if they wish to issue bonds to buy Bitcoin, a more feasible approach would be to issue short-term bonds with a maturity of less than 1 year abroad, which would not require foreign debt review and registration.
2. Discussion on the feasibility of overseas-listed Chinese enterprises increasing stock issuance to buy Bitcoin
If overseas-listed Chinese enterprises want to issue additional stocks in the overseas capital market to finance Bitcoin purchases, they must first meet the local securities market issuance conditions and compliance requirements. According to Lawyer Mankun's analysis, for Chinese enterprises that have already been listed overseas, the main management basis for domestic regulatory authorities is the (Trial Measures for the Management of Securities Issuance and Listing by Domestic Enterprises Overseas) issued by the China Securities Regulatory Commission on February 17, 2023 (hereinafter referred to as the 'Overseas Listing Management Measures'). According to the (Overseas Listing Management Measures), after the issuer issues and lists overseas, they must file with the China Securities Regulatory Commission within 3 working days after the issuance is completed. This provision pertains to the case of increasing stock issuance by Chinese enterprises already listed overseas, with the management measure being post-event filing with the China Securities Regulatory Commission. Unlike issuing foreign debt, the (Overseas Listing Management Measures) does not specify or restrict the use of funds for stock increases, so for enterprises already listed overseas, increasing stock issuance for purchasing Bitcoin hinges on meeting local legal requirements and issuance conditions, making this approach far more feasible than issuing medium and long-term foreign debt abroad to buy Bitcoin.
However, it should be noted that there have been no cases observed of overseas-listed Chinese enterprises increasing stock issuance to finance Bitcoin purchases. It is also uncertain how the China Securities Regulatory Commission will respond after receiving such cases for record-keeping, so it is advisable to maintain sufficient communication with regulatory authorities before implementation.
Summary by Lawyer Mankun
In-depth analysis of MicroStrategy's financing strategy for Bitcoin purchases reveals that its success is backed by precise market insight, innovative financing methods, and a profound understanding of the cryptocurrency market. MicroStrategy's story undoubtedly provides a vivid case for global investors on how to seek opportunities in emerging markets. However, for Chinese enterprises, replicating MicroStrategy's success is not easy. The regulatory environment in mainland China, foreign debt management policies, and cautious attitudes toward cryptocurrencies pose certain challenges for Chinese enterprises in financing Bitcoin purchases abroad.
For Chinese enterprises, although replicating MicroStrategy's successful path is full of challenges, it is precisely these challenges that prompt businesses to pay more attention to compliance, innovation, and risk management. Lawyer Mankun believes that as long as they maintain sharp market insight, continuously innovate financing methods, and deeply understand and respect the rules of the cryptocurrency market, Chinese enterprises have the opportunity to leverage the capital market to amplify their investment returns in the crypto field and may even pave a brand new path in this area, creating their own success stories.
