Written by: Lawyer Liu Honglin
MicroStrategy, a U.S. company known for providing business intelligence and mobile software solutions, has gained considerable attention in recent years due to its aggressive investments in the Bitcoin market. Since it began purchasing Bitcoin in large quantities 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 over the next three years, raising a total of $42 billion to purchase more Bitcoin. MicroStrategy's financing strategy to buy coins 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: MicroStrategy official website
In this article, Lawyer Mankun will dissect the wealth code behind MicroStrategy's financing strategy to buy coins 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 to Buy Coins
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 world's first publicly listed company to incorporate Bitcoin into its capital strategy. Since then, MicroStrategy has been "rapidly accelerating" in the wave of Bitcoin, continuously increasing its Bitcoin holdings through financing methods such as bond issuance, and currently holds over 420,000 Bitcoins. This strategy has enabled 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 journey, not only raising funds through bond issuance but also cleverly utilizing various means such as equity financing and bank loans to "add bricks and tiles" to its Bitcoin investment plan.
Bond Financing
MicroStrategy mainly raises funds through the issuance of convertible bonds, convertible preferred notes, and senior secured bonds, specifically for purchasing Bitcoin, among which the most used financing method by MicroStrategy is convertible bonds. These debt instruments vary in interest rates and maturity dates, but their common goal is to expand MicroStrategy's Bitcoin holdings.
Convertible Bonds: These are hybrid securities that allow bondholders to convert their bonds into the company's common stock within a specified time. For example, in December 2020, MicroStrategy raised $650 million through the issuance of convertible bonds, and all these funds were used to purchase Bitcoin.
Convertible Preferred Notes: These are a special type of debt instrument that grants holders the right to convert the notes into company preferred shares at a future point. Preferred shares are a special type of stock that has priority over common stockholders in compensation during bankruptcy liquidation. For example, in February 2021, MicroStrategy issued convertible preferred notes worth $900 million, and the proceeds were used to purchase Bitcoin;
Senior Secured Notes: These are backed by the company's assets and hold a higher 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 the issuance of senior secured notes worth $500 million, with the proceeds also used to purchase Bitcoin.
Equity Financing
Equity financing, i.e., the company raises funds by issuing additional stocks, is one of MicroStrategy's important "treasures". The company sells Class A common stock, like tapping into an endless "stream of funds" from the capital market, and invests the proceeds heavily into purchasing Bitcoin. For example, in August 2021, MicroStrategy raised funds by selling ordinary shares worth $900 million to purchase Bitcoin.
MicroStrategy's practice of purchasing Bitcoin by selling common stocks has formed a unique "value dilution" logic, which means that although the company has diluted the rights of existing shareholders, due to the appreciation expectations of Bitcoin, this dilution is interpreted by the market as an increase in asset value, thereby driving the company's stock price up.
Bank Loans
MicroStrategy has also actively ventured into the lending field, using its held Bitcoin as collateral to boldly borrow funds from financial institutions. This "borrowing to generate profit" strategy allows it to seize every investment opportunity in the volatile Bitcoin price market. When Bitcoin prices are favorable, it borrows funds in a timely manner to buy Bitcoin, akin to seizing opportunities in the "golden track" of the market, further expanding its Bitcoin asset scale. For instance, in September 2021, MicroStrategy obtained a $205 million loan from Silvergate Bank, with part of the Bitcoin held by the company used as collateral for purchasing more Bitcoin.
MicroStrategy's Synergistic Strategy of Stocks, Coins, and Debts and Its Effects
Thanks to these years of actively buying Bitcoin strategies, MicroStrategy's stock price has soared from $20 in 2020 to about 20 times that today. MicroStrategy's stock price has become an amplifier of Bitcoin's price, with its growth in recent years far exceeding that of Bitcoin itself. So why has MicroStrategy's financing to buy coins strategy been so effective? We believe the reasons are as follows:
Stock - Coin Synergy Relationship:
MicroStrategy's strategy of purchasing Bitcoin through premium stock issuance helps to drive up the price of Bitcoin. As the price of Bitcoin rises, the company's net asset value and earnings will also increase correspondingly, forming a positive cycle. Additionally, through financing to purchase Bitcoin, the company's profit growth accelerates, and valuation multiples expand, which may lead to a transformation of the stock price from linear growth to exponential growth, causing the increase in market capitalization and stock price to exceed the price increase of Bitcoin itself.
Stock - Bond Synergy Relationship:
As MicroStrategy's market capitalization rises, the company gradually enters more stock indices, increasing the number and trading volume of derivative products, thereby reducing the financing costs of stocks and bonds. The design of MicroStrategy's convertible bonds is unique, with the choice of conversion to equity or cash repayment controlled by the company, which avoids the default issue caused by the inability to repay convertible bonds at maturity. Bondholders either preserve their capital and earn interest or enjoy the rise in stock prices after the bonds are converted into MicroStrategy's stocks. Essentially, this type of bond has become a "debt-equity hybrid" 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 price. Seeing the huge profits behind MicroStrategy's financing to buy coins, some companies have begun to follow suit. Especially in the second half of this year, with the rise in cryptocurrency markets, listed companies have launched large-scale purchases of Bitcoin.
As a web 3.0 law firm rooted in China, Lawyer Mankun aims to analyze for Chinese listed enterprises whether they can emulate MicroStrategy's successful path and create an Asian version of the MicroStrategy legend.
For listed companies in China, whether through bond issuance or additional stock issuance, if the purpose of financing is to purchase Bitcoin, there will be compliance obstacles. According to the (Securities Law of the People's Republic of China) and the (Measures for the Issuance and Trading of Corporate Bonds), the funds raised by enterprises through bond issuance or additional stock issuance should be used for projects that comply with national macro-control policies and industrial policies, as well as for the normal production and operational activities of enterprises, and must not be used for non-productive expenditures. Therefore, for listed companies in mainland China to finance the purchase of Bitcoin, there are significant difficulties from the regulatory perspective.
Since it is not feasible for domestic listed companies, is it feasible for overseas-listed Chinese enterprises? Currently, companies such as Boya Interactive, Meitu, Blueport Interactive, and Nano Labs listed on the Hong Kong Stock Exchange or NASDAQ have spent heavily to purchase Bitcoin. According to public data, these companies' funds for purchasing Bitcoin come from their own cash reserves, and there has been no special financing in the capital market for purchasing Bitcoin. So if they want to emulate MicroStrategy's capital market financing to buy coins, is it feasible? Lawyer Mankun analyzes as follows:
1. Feasibility analysis of overseas-listed Chinese enterprises issuing bonds to buy coins
Foreign debt review registration is a prerequisite
If Chinese enterprises want to issue bonds abroad, in addition to meeting local securities market issuance conditions and compliance requirements, the primary consideration is the foreign debt review registration matters of the National Development and Reform Commission (hereinafter referred to as 'NDRC'). However, since 2023, the NDRC has shown a tightening trend regarding foreign debt review registration. On January 10, 2023, the NDRC released the (Management Measures for the Review and Registration of Enterprises' Medium and Long-term Foreign Debts) (NDRC Order No. 56, hereinafter referred to as the "(Foreign Debt Management Measures)"), which came into effect on February 10, replacing the previously main normative document for managing enterprises' borrowing of medium and long-term foreign debts (Notice on Promoting the Reform of the Registration System for Enterprises to Issue Foreign Debts) (Development and Reform Foreign Capital [2015] No. 2044, hereinafter referred to as "Document No. 2044"). During the era of Document No. 2044, the NDRC managed the foreign debt of Chinese enterprises through a pre-registration management approach. However, the (Foreign Debt Management Measures) ended this situation, changing foreign debt management to pre-review registration. Without review registration, borrowing foreign debt is not allowed. This means that since February 10, 2023, overseas-listed Chinese enterprises must first obtain the approval of the NDRC for foreign debt review registration before borrowing medium and long-term foreign debts abroad.
Source: National Development and Reform Commission official website
Which foreign debts belong to medium to long-term foreign debts?
According to the (Foreign Debt Management Measures), medium to long-term foreign debt refers to debt instruments borrowed by Chinese enterprises from abroad with a term of more than 1 year (excluding 1 year), including but not limited to senior debt, perpetual bonds, capital bonds, medium-term notes, convertible bonds, exchangeable bonds, financing leases, and commercial loans, etc. Therefore, if overseas-listed Chinese enterprises want to imitate MicroStrategy's bond financing and bank loan financing, as long as the term exceeds 1 year, they fall within the scope of foreign debt review registration.
What are the restrictions on the use of foreign debt?
(Foreign Debt Management Measures) Regarding the use of foreign debt, the main regulations are as follows:
Article 7 stipulates that the use of funds for enterprises' foreign debt should focus on the main business and be conducive to implementing major national strategies and supporting the development of the real economy.
Article 8 stipulates that enterprises may make autonomous decisions on the use of foreign debt funds based on their creditworthiness and actual needs, and its use should meet the following conditions:
（I） Not violate China's laws and regulations;
（II） Not threaten or harm China's national interests and the security of its economy and information data;
（III） Not violate China's macroeconomic control objectives;
（IV） Not violate relevant national development plans and industrial policies, and not increase implicit local government debt;
（V） Must not be used for speculation or manipulation; except for banking financial enterprises, must not be lent to others, unless specified in the foreign debt review registration application materials and approved.
Article 25 stipulates that the actual use of funds raised from foreign debt must be consistent with the contents of the (review registration certificate) and must not be diverted for 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 (Foreign Debt Management Measures). On one hand, whether purchasing Bitcoin falls within the focus on the main business and supports the development of the real economy is indeed questionable; on the other hand, financial regulatory agencies in mainland China have issued a series of strict control policies regarding virtual currencies, such as the (Notice on Further Preventing and Handling Risks of Speculation in Virtual Currency Transactions), which clearly states that virtual currency-related business activities are illegal financial activities, and participation in them carries legal risks; relevant civil legal acts of investing in virtual currencies are also invalid. Therefore, from the current policy tendency of mainland regulatory agencies towards Bitcoin, bond investment in Bitcoin is highly likely to be deemed by the National Development and Reform Commission as contrary to China's macroeconomic control objectives and industrial policies.
Can red chip structures or VIE structures be exempted from foreign debt review registration?
Seeing the above, many people may ask, can we bypass the foreign debt review registration by building a special structure?
According to Lawyer Mankun's experience, during the era of Document No. 2044, there were different views and opinions within the National Development and Reform Commission regarding whether foreign entities under red chip or VIE structures should conduct registration for bond issuance. However, after the implementation of the (Foreign Debt Management Measures), this gray area has been closed off, explicitly stating that domestic enterprises indirectly borrowing foreign debts abroad are also subject to this measure. Indirect foreign bond issuance refers to enterprises whose main operations are in China, issuing bonds or borrowing commercial loans abroad in the name of enterprises registered overseas, based on the equity, assets, income, or other similar rights of domestic enterprises. Moreover, the National Development and Reform Commission has clarified that red chip structure enterprises are also applicable. Therefore, under such a wide range of application, structures that may have previously circumvented foreign debt review registration now need to consult the National Development and Reform Commission on a case-by-case basis and obtain a clear opinion before determining legality and compliance.
In summary, Chinese enterprises listed overseas face enormous challenges in the foreign debt review registration for issuing medium to long-term foreign debts to purchase Bitcoin. Therefore, if they want to issue bonds to buy coins, a more feasible way is to issue short-term bonds with a term of less than 1 year abroad, which can be done without undergoing foreign debt review registration with the NDRC.
2. Discussion on the feasibility of overseas-listed Chinese enterprises issuing additional stocks to purchase coins
If overseas-listed Chinese enterprises wish to issue additional stocks in the overseas capital market to finance the purchase of Bitcoin, they must first meet the local securities market's issuance conditions and compliance requirements. According to the analysis by Lawyer Mankun, for Chinese enterprises that have already been listed abroad, the primary management basis of the domestic regulatory agency is the China Securities Regulatory Commission's (CSRC) (Measures for the Management of Domestic Enterprises Issuing Securities and Listing Abroad) (hereinafter referred to as the "(Overseas Listing Management Measures)") issued on February 17, 2023. According to the (Overseas Listing Management Measures), after the issuer's overseas issuance and listing, if issuing securities in the same overseas market, they must file with the CSRC within 3 working days after the issuance is completed. This refers to the situation where already overseas-listed Chinese enterprises issue additional stocks, and the management measure is post-filing with the CSRC. Unlike issuing foreign debt, the (Overseas Listing Management Measures) does not specifically stipulate or restrict the use of funds in such additional stock issuances. Therefore, for already overseas-listed enterprises to issue additional stocks to finance the purchase of Bitcoin, the key lies in meeting local regulatory requirements and issuance conditions, making this approach much more feasible than issuing medium and long-term foreign debts abroad to buy coins.
However, it should be noted that there have been no cases seen where overseas-listed Chinese enterprises have issued additional shares to finance the purchase of coins. It is also unknown how the China Securities Regulatory Commission will respond after receiving such cases for record-keeping, thus it is recommended to maintain sufficient communication with regulatory agencies before implementation.
Summary by Lawyer Mankun
In-depth analysis of MicroStrategy's financing to buy coins strategy reveals that its success is backed by precise market insight, innovative financing methods, and a deep understanding of the cryptocurrency market. The story of MicroStrategy 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 an easy task. The regulatory environment in mainland China, foreign debt management policies, and the cautious stance towards cryptocurrencies pose certain challenges for Chinese enterprises to finance the purchase of Bitcoin abroad.
For Chinese enterprises, although replicating MicroStrategy's successful path is full of challenges, it is precisely these challenges that prompt enterprises to pay more attention to compliance, innovation, and risk management. Lawyer Mankun believes that as long as they maintain sharp market insights, continually innovate financing methods, and deeply understand and respect the rules of the cryptocurrency market, Chinese enterprises have the opportunity to amplify their investment returns in the crypto field through the capital market, and may even pave a completely new path in this field, creating their own success stories.
