Written by: Lawyer Liu Honglin
MicroStrategy, an American company known for providing business intelligence and mobile software solutions, has attracted much attention in recent years for its aggressive investments in the Bitcoin market. Since it began buying large amounts of Bitcoin in 2020, its stock price has risen about 20 times. On October 30, 2024, MicroStrategy announced the so-called "21/21 Plan", which plans to conduct $21 billion in equity financing and $21 billion in bond issuance in the next three years, raising a total of $42 billion to buy more Bitcoin. MicroStrategy's financing strategy for buying coins has not only made it famous in the cryptocurrency field, but also triggered widespread discussion in the market about its investment strategy, risk management and future prospects.
Image source: MicroStrategy official website
In this article, Attorney Mankiw will dismantle the wealth code of MicroStrategy's financing and purchase of cryptocurrencies, and analyze whether it is possible to recreate an Asian version of MicroStrategy from the perspective of Chinese companies listed at home and abroad.
MicroStrategy's "Wealth Code": A Complete Analysis of the Financing and Buying Coin Strategy
Analysis of MicroStrategy’s Financing Channels
In August 2020, under the leadership of Chairman Michael Saylor, MicroStrategy boldly invested US$250 million to purchase approximately 21,400 Bitcoins, becoming the first listed company in the world to incorporate Bitcoin into its capital strategy. Since then, MicroStrategy has been riding the wave of Bitcoin, and the funds obtained through debt issuance and other financing methods have continued to increase its Bitcoin holdings. Currently, the number of Bitcoins it holds has exceeded 420,000. This strategy allows the micro-strategy to achieve significant returns on investment when the price of Bitcoin rises.
According to attorney Mankiw's observations and analysis, MicroStrategy has adopted a "diversified" strategy in its financing process. It not only raised funds through issuing bonds, but also cleverly used equity financing, bank loans and other means to "add bricks and tiles" to its Bitcoin investment plan.
Bond financing
MicroStrategy raises funds primarily through the issuance of convertible bonds, convertible preferred notes, and senior secured bonds, specifically for the purchase of Bitcoin, with the most common financing method used by MicroStrategy 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: This is a hybrid security that allows bondholders to convert the bonds into common stock of the company within a certain period of time. For example, in December 2020, MicroStrategy raised $650 million through the issuance of convertible bonds, all of which were used to purchase Bitcoin.
Convertible senior notes: This is a special debt instrument that gives the holder the right to convert the notes into preferred stock of the company at a certain point in the future. Preferred stock is a special type of stock that is compensated before common stockholders in the event of a company's bankruptcy liquidation. For example, in February 2021, MicroStrategy issued $900 million worth of convertible senior notes, and the proceeds were used to purchase Bitcoin;
Senior secured notes: It is secured by the company's assets and has a higher priority in the company's debt structure. In the event of bankruptcy or liquidation of the company, holders of senior secured notes will be repaid before other unsecured creditors. For example, in June 2021, MicroStrategy completed the issuance of $500 million worth of senior secured notes, and the proceeds were also used to purchase Bitcoin.
Equity Financing
Equity financing, that is, companies raise funds by issuing additional shares, is one of MicroStrategy's important "magic weapons". The company sells Class A common stock, just like drawing a steady stream of "living water" from the "capital pool" of the capital market, and investing the proceeds in large quantities in Bitcoin purchases. For example, in August 2021, MicroStrategy raised funds by selling $900 million worth of common stock to buy Bitcoin.
MicroStrategy's practice of purchasing Bitcoin by selling common stock has formed a unique "value dilution" logic, that is, although the company has diluted the rights of existing shareholders, due to the expected appreciation of Bitcoin, this dilution is interpreted by the market as an appreciation of asset value, thereby driving up the company's stock price.
Bank Loans
MicroStrategy is also actively involved in the field of lending. It uses its own Bitcoin as collateral and boldly borrows funds from financial institutions. This "borrowing chickens to lay eggs" strategy enables it to seize every investment opportunity in a market where Bitcoin prices fluctuate. When the price of Bitcoin is in a favorable position, borrowing funds in time to buy Bitcoin is like seizing the opportunity on the "golden track" of the market and further expanding the scale of its Bitcoin assets. For example, in September 2021, MicroStrategy obtained a loan worth $205 million through Silvergate Bank, which was collateralized by part of the company's Bitcoin holdings to purchase more Bitcoin.
MicroStrategy's equity, currency and bond synergy strategy and its effectiveness
Thanks to the strategy of actively buying Bitcoin in recent years, MicroStrategy's stock price has soared about 20 times from $20 in 2020 to date. MicroStrategy's stock price has become an amplifier of Bitcoin's price, and its growth in recent years has far exceeded that of Bitcoin. So why is MicroStrategy's financing strategy so effective? We believe there are two reasons:
Stock-Coin Synergy:
MicroStrategy's purchase of Bitcoin by issuing shares at a premium helps drive up the price of Bitcoin. As the price of Bitcoin rises, the company's net assets per share and earnings will increase accordingly, forming a positive cycle. In addition, by financing the purchase of Bitcoin, the company's profit growth rate is accelerated and the valuation multiples are expanded, which may cause the stock price to shift from linear growth to exponential growth, causing the increase in market value and stock price to exceed the increase in the price of Bitcoin itself.
Equity-Debt Synergy:
As MicroStrategy's market value rises, the company gradually enters more stock indexes, which increases the number and volume of traded derivatives, thereby reducing the financing costs of stocks and bonds. MicroStrategy's convertible bonds are uniquely designed, and the option of conversion or cash repayment is in the hands of the company, which avoids the default problem caused by the inability to repay the convertible bonds at maturity. Bondholders can either keep their principal and receive interest, or enjoy the rise in stock prices after the bonds are converted into MicroStrategy's stocks. In essence, this type of bond has become a "bond-equity" tool that is friendly to stock prices and shareholders.
Rebuilding the Asian version of MicroStrategy: Possibilities and challenges
Just buying Bitcoin can increase the stock price 20 times. Seeing the huge profits behind MicroStrategy's financing and buying coins, some companies have begun to follow MicroStrategy. Especially in the second half of this year, with the rise of cryptocurrency prices, listed companies have started to buy Bitcoin on a large scale.
As a web3.0 law firm rooted in China, Attorney Mankiw wants to analyze for Chinese listed companies whether they can emulate the success of MicroStrategy and recreate an Asian version of the MicroStrategy legend.
For listed companies in China, whether they issue bonds or additional shares, if the purpose of financing is to purchase Bitcoin, there will be compliance obstacles. According to the relevant provisions of the (Securities Law of the People's Republic of China) and the (Administrative Measures for the Issuance and Trading of Corporate Bonds), the funds raised by enterprises issuing bonds or additional shares should be used for projects that comply with the national macro-control policies and industrial policies, as well as the normal production and operation activities of the enterprise, and shall not be used for non-productive expenditures. Therefore, there are great difficulties at the regulatory level for domestic listed companies to raise funds to purchase Bitcoin.
Since it is not feasible for domestic listed companies, is it feasible for Chinese companies listed overseas? At present, Chinese companies listed on the Hong Kong Stock Exchange or Nasdaq, such as Boyaa Interactive, Meitu, Linekong Interactive, and Nano Labs, have spent a lot of money to buy Bitcoin. From the public data, the funds used by these companies to buy Bitcoin are all the company's own existing funds, and there is no special financing in the capital market for the purchase of Bitcoin. So if they want to follow MicroStrategy and raise funds to buy coins in the capital market, is it feasible? Lawyer Mankiw analyzed as follows:
1. Feasibility analysis of overseas listed Chinese companies issuing bonds to buy currency
Foreign debt review and registration is a prerequisite
If Chinese companies want to issue bonds overseas, in addition to meeting the bond issuance conditions and compliance requirements of the local securities market, the first consideration is the foreign debt review and registration of the National Development and Reform Commission of China (hereinafter referred to as the "NDRC"). However, since 2023, the NDRC has shown a tightening trend in the review and registration of foreign debt. On January 10, 2023, the NDRC issued the (Administrative Measures for the Review and Registration of Medium- and Long-Term Foreign Debt of Enterprises) (National Development and Reform Commission Order No. 56, hereinafter referred to as the "(Foreign Debt Management Measures)"), which came into effect on February 10, replacing the previous main regulatory document for managing the borrowing of medium- and long-term foreign debt by enterprises (National Development and Reform Commission Notice on Promoting the Reform of the Registration and Filing System for the Issuance of Foreign Debt by Enterprises) (NDRC Foreign Investment [2015] No. 2044, hereinafter referred to as "Document No. 2044"). In the era of Document No. 2044, the NDRC’s management of the foreign debt of Chinese companies was a pre-registration management method. However, the (Foreign Debt Management Measures) ended this situation and changed the foreign debt management to a pre-examination registration method. Foreign debt cannot be borrowed without review and registration. This also means that from February 10, 2023, Chinese companies listed overseas will first need to obtain the approval of the NDRC for foreign debt review and registration in order to borrow medium- and long-term foreign debt overseas.
Image source: National Development and Reform Commission official website
Which foreign debts are medium- and long-term foreign debts?
According to the (Foreign Debt Management Measures), medium- and long-term foreign debt refers to debt instruments borrowed by Chinese enterprises from overseas with a term of 1 year or more (inclusive), including but not limited to senior bonds, perpetual bonds, capital bonds, medium-term notes, convertible bonds, exchangeable bonds, financial leases and commercial loans, etc. Therefore, if Chinese enterprises listed overseas want to follow the bond financing and bank loan financing adopted by MicroStrategy, as long as the term exceeds 1 year, they are within the scope of foreign debt review and registration.
Are there any restrictions on the use of foreign debt?
The provisions of the (Foreign Debt Management Measures) regarding the use of foreign debt are mainly as follows:
Article 7 stipulates that the use of external debt funds by enterprises should focus on their main businesses, which will be conducive to coordinating the implementation of major national strategies and supporting the development of the real economy.
Article 8 stipulates that enterprises may make independent decisions on the use of foreign debt funds at home and abroad based on their own credit status and actual needs, and the use of foreign debt funds should meet the following conditions:
(1) Not violating the laws and regulations of the People's Republic of my country;
(2) Do not threaten or harm my country's national interests, economy, information and data security;
(3) not violate my country's macroeconomic control objectives;
(iv) not violate relevant development plans and industrial policies of my country, and not increase hidden debts of local governments;
(V) The funds shall not be used for speculation or speculation; except for banking financial institutions, they shall not be lent to others, unless the relevant circumstances have been stated in the application materials for external debt review and registration and approval has been obtained.
Article 25 stipulates that the actual use of funds raised by an enterprise through foreign debt should be consistent with the contents of the (review and registration certificate) and shall not be used for other purposes.
Lawyer Mankiw believes that the use of bond funds to purchase Bitcoin is difficult to meet the relevant requirements of the (Foreign Debt Management Measures). On the one hand, whether the purchase of Bitcoin is a focus on the main business and helping the development of the real economy is indeed questionable; on the other hand, China's mainland financial regulatory authorities have issued a series of strict control policies for virtual currencies, such as (Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation), which clearly states that virtual currency-related business activities are illegal financial activities, and there are legal risks in participating in them. The relevant civil legal acts of investing in virtual currencies are also invalid. Therefore, judging from the current policy orientation of mainland regulatory authorities towards Bitcoin, issuing bonds to invest in Bitcoin is very likely to be identified by the National Development and Reform Commission as violating my country's macroeconomic control goals and industrial policies.
Can red chip structures or VIE structures be exempted from foreign debt review and registration?
After reading the above, many people may ask, is it possible to avoid foreign debt review and registration by building a special structure?
According to Mankiw’s experience, in the era of Document No. 2044, there were different views and opinions within the NDRC on whether the issuance of bonds by overseas entities under the red chip structure or VIE structure should be registered. However, after the implementation of the (Foreign Debt Management Measures), this gray area was also blocked. It clearly stipulates that the measures also apply to domestic enterprises indirectly borrowing foreign debt overseas. Indirect issuance of bonds overseas refers to enterprises whose main business activities are in China, issuing bonds or borrowing commercial loans overseas in the name of enterprises registered overseas, based on the equity, assets, income or other similar rights of domestic enterprises. In addition, the NDRC clearly stated in the FAQ on this matter on its official website that red chip structure enterprises are also applicable. Therefore, under such a wide scope of application, structures that may have been able to circumvent the review and registration of foreign debts in the past now need to be consulted with the NDRC on a case-by-case basis, and only after obtaining a definite opinion can it be determined to be legal and compliant.
In summary, Chinese overseas listed companies face huge challenges in issuing medium- and long-term foreign debt to purchase Bitcoin at the stage of review and registration with the National Development and Reform Commission. Therefore, if they want to issue bonds to buy Bitcoin, a more feasible way is to issue short-term bonds with a term of less than one year overseas, which does not require foreign debt review and registration with the National Development and Reform Commission.
2. Feasibility study on the issuance of additional shares by overseas listed Chinese companies to buy currency
If Chinese companies listed overseas want to issue additional stocks in the overseas capital market to raise funds to purchase Bitcoin, they must first meet the issuance conditions and compliance requirements of the local securities market. According to lawyer Mankiw, for Chinese companies that have already been listed overseas, the main management basis of domestic regulatory agencies is the China Securities Regulatory Commission's (Trial Measures for the Administration of Overseas Issuance and Listing of Securities by Domestic Enterprises) on February 17, 2023 (hereinafter referred to as the "(Overseas Listing Management Measures)"). According to the (Overseas Listing Management Measures), after the issuer's overseas issuance and listing, if it issues securities in the same overseas market, it shall file with the China Securities Regulatory Commission within 3 working days after the issuance is completed. This article refers to the situation of additional issuance of stocks by Chinese companies that have already been listed overseas, and the management measure is to file with the China Securities Regulatory Commission afterwards. Unlike the issuance of foreign debt, the (Overseas Listing Management Measures) does not make specific provisions or restrictions on the use of funds in this case of additional issuance of stocks. Therefore, the key for companies that have already been listed overseas to issue additional stocks to raise funds to purchase Bitcoin is to meet local regulatory requirements and issuance conditions. The feasibility of this method is far higher than issuing medium- and long-term foreign debt overseas to buy coins.
However, it should be noted that there are currently no cases of Chinese companies listed overseas issuing additional shares to raise funds for buying cryptocurrencies, and it is unknown how the China Securities Regulatory Commission will react after receiving such post-registrations. Therefore, it is recommended to maintain full communication with the regulatory authorities before implementation.
Attorney Mankiw's Summary
After an in-depth analysis of MicroStrategy's financing strategy for buying coins, we can see that behind its success are accurate market insights, innovative financing methods, and a deep understanding of the cryptocurrency market. The story of MicroStrategy undoubtedly provides global investors with a vivid example of how to find opportunities in emerging markets. However, it is not easy for Chinese companies to replicate MicroStrategy's success. The regulatory environment in mainland China, foreign debt management policies, and cautious attitude towards cryptocurrencies have all created certain challenges for Chinese companies to raise funds to buy Bitcoin overseas.
For Chinese companies, although it is challenging to replicate MicroStrategy's success, it is these challenges that prompt companies to pay more attention to compliance, innovation and risk management. Mankiw believes that as long as they maintain keen market insight, constantly innovate financing methods, and deeply understand and respect the laws of the cryptocurrency market, Chinese companies will have the opportunity to use the capital market to magnify their investment returns in the encryption field, and may even open up a new path in this field and create their own success story.
