Written in conjunction with Arca CIO Jeff Dorman
We think this ‘Phantom Trope’ proposal for SUSHI is value-destroying – Arca will backstop a new deal with the first tranche 31% above the current TWAP price. We encourage the community to vote down this proposal. Below we have outlined an executive summary as well as a more detailed counter-proposal.
Executive Summary (TL/DR):
- Arca holds 7.51% of the xSUSHI circulating supply. We are opposed to the deal as proposed and feel strongly that it should not be put up for consideration. Our rationale is below along with an alternative proposal:
- Sushiswap does not need money, as indicated by 0xMaki himself. Sushiswap has $10.15M worth of SUSHI in its ops wallet and $214M in SUSHI in its Treasury Wallet, so the asset mix is predominantly SUSHI tokens. We agree that there is merit to diversifying, but not at current prices. Current market conditions do not justify a raise of this size. If Sushiswap does need money, we’d like to see justification for why $60mm is the right number. What are run-rate expenses and how much runway does $60mm give Sushiswap?
- The proposed discount and short lock-up are not indicative of a vibrant growth project, which Sushiswap is. SUSHI is currently trading at a massive discount to its fair value, and now is absolutely not the time to be selling.
- We believe our expertise in capital markets and deal structuring can bring more economic and strategic benefit to Sushiswap and its existing investors/community than the current proposal.
- Some of the VCs on the list touting their “strategic benefits” are the same ones selling SUSHI into a declining low-volume market to buy this new deal at cheaper levels. In other words, this looks more like an arbitrage trade than a strategic, long-term investment.
Arca’s Proposal - As large investors, and strong believers in Sushiswap, we are very willing to continue putting our money where our mouth is. If the Sushiswap community is intent on selling from its treasury in this environment, then we will happily be buyers at prices that are advantageous to us, but fair to the community. Since we strongly believe that Sushi is already trading at a significant discount to fair value, we also won’t require further discounts. In fact, we will pay above current trading levels.
The average Price-to-Sales ratio of the entire DEX market, excluding the highest outliers (KNC and ZRX) is 12.7x. If SUSHI traded at these levels, SUSHI would trade at $39.85. We see no reason for $SUSHI to trade at a discount to its competitors. We propose that Sushiswap sell a fixed number of tokens at different price intervals, based on the lowest closing price in 2Q 2021 ($6.40 on 6/25/2021). We believe Sushiswap should offer tokens transparently on Sushiswap using the new limit order feature, so that every member of the Sushiswap community has the chance to participate. These prices are as follows:
- Why is this proposal better?
There is clearly strong demand for the SUSHI token given the vibrant community, project fundamentals, and large number of “strategic” investors who have expressed interest in a private round. If there is this much bullishness on Sushiswap’s future, investors should buy SUSHI, forgo the discount, and add the “strategic value” being claimed.
We believe it is more valuable to have a diversified community of many smaller investors and users than it is to have a concentrated group of large passive investors.
Conclusion: If our proposal is accepted, Arca will backstop the deal with a minimum purchase of $10 million at the first offering price. With this higher bid from Arca, Sushiswap would be negligent offering tokens below this price. Our proposal saves Sushiswap $22.6mm dollars and releases 4mm less tokens saving SUSHI holders from additional dilution.
Background: My name is Jeff Dorman, Chief Investment Officer at Arca. I started my career as a capital markets investment banker and worked on the structuring, syndication and pricing of many debt and equity deals. While the digital assets space is new and exciting due to its differences, there are some components of TradFi debt and equity raises that can and should be utilized to prevent avoidable mistakes like the deal presented for Sushiswap.
Arca is one of the largest holders of xSUSHI with 7.51% of the xSUSHI circulating supply. We have bought every one of these tokens in the secondary market, without lockups or discounts. We are staking, we are customers, we own insurance on Nexus Mutual, and we have been very outspoken publicly, supporting the ecosystem. Contrary to popular belief, you don’t have to announce your investment, get a discount or have a lockup to be a valuable, long-term investor. We can sell at any time, but instead we have been actively buying in the open market at these depressed levels. We are active buyers because, in my 20+ years of professional investing experience, I have never seen a company with hyperbolic growth and a healthy balance sheet trading at 3x sales with an average dividend yield of 16.4% (20.8% if we annualize the last rolling quarter).
We believe the current proposed deal lacks a very simple understanding of how capital markets are supposed to function, and completely ignores key differences between privately held and publicly traded companies. Below is our rationale for why this deal needs to be restructured, and our counter-proposal for what Sushiswap should do instead.
There are 3 reasons a company raises money - via debt, equity or tokens
- Company needs money - it has been articulated clearly that this is not true for Sushiswap
- Company thinks they will need money in the future and wants to take advantage of a “hot market” today – clearly this is not true as this is far from a hot market
- Company sees strategic benefits raising money from certain investors – if this is true, it has not been clearly articulated in an actionable plan on what these VC’s will bring to the table.
There are also 3 types of capital market raises:
Syndicated Private raises – this is for companies that do not have access to public markets and therefore must raise money behind closed doors, from whoever will listen to the company and give them money. This is not an efficient process, and the price is often a reflection of what 1-2 people are willing to pay for it and who has access to the company, not necessarily a “going market rate”. Venture capital investors thrive on this asymmetry of access, and companies are not particularly adept at efficiently finding the best investor or price. There is often a time cost here as well, as it takes a long time to privately find a few willing investors.
Syndicated Public raises – this is typically done at market price, or at a slight discount to public market prices. It is syndicated by an investment bank who does independent research to come up with a fair price. The deal is offered to all investors in the community, and then the bankers and the company decide who gets allocations - if the deal is oversubscribed, investors will get less than what they want, and the price usually moves up after pricing. If the deal is undersubscribed, it typically prices cheaper or the deal is downsided (less is sold). These deals can be done much more quickly than private deals, and lead to the greatest diversity of the investor base, and the best price.
PIPEs (Private in Public Equity) – PIPE’s are generally used by companies with small market caps or small public floats, or for companies who want to fast track a round in lieu of longer regulatory filings. Typically these are done only when there is no real way to issue stock publicly, so they issue private stock that can be converted into the public stock. Galaxy Digital did a PIPE last year, because the float on their stock was tiny (Novogratz owned it all), and because it would have taken too much time to do a public offering. FWIW, the PIPE came at a 25% discount to the publicly traded stock price, and was issued into strength after GLXY stock had traded up to $4.60 (+300% in 3 months following a 3 year bear market). That’s when you issue a PIPE - when you’re trying to work quickly into strength, not a 3-month drawn out process into weakness.
For all intents and purposes, Sushiswap is a publicly traded company, with ample public liquidity. There is no reason to do a private round (PIPE), at a steep discount, unless Sushiswap was distressed and needed bailout financing (which of course is not true). Sushiswap has access to millions of potential investors, and does not need to find a handful privately to invest. The need for private financing is over - it is time to access the public markets.
Conversely, every single investor who has indicated interest in this deal has access to the public exchanges where SUSHI trades, and if they really want to own SUSHI, they have had the ability to buy it in the public market. This is even more true when an asset falls 70% in 8 weeks – plenty of tokens for sale, go out and buy them if you’re bullish. VCs historically don’t buy private shares in public stocks because their “value” diminishes once a company has access to public markets.
In a typical publicly underwritten deal, an investment banker would gauge interest from investors, and possibly line up a large lead investor (i.e. Blackrock) to help determine pricing (i.e. at what price does that lead investor show interest?). The deal is then marketed to every other investor at that price. Once that price is set, which is likely fixed and not some arbitrary 30-day TWAP that can be easily manipulated, investors have the chance to “take it or leave it”. Because the company is offering this deal to many investors at once, rather than hand-to-hand combat in a private setting, it doesn’t matter if some investors pass on the deal. The company and the bankers have a strong enough gauge on investor demand to feel confident enough to launch the deal at a certain price, even if they don’t know exactly who will ultimately invest. If market conditions change during the marketing of the deal, or if there is insufficient demand, the deal might get pulled, or pricing might change. You often see a deal pulled citing “adverse market conditions”, which just means “we’ll revisit later rather than offer this at a distressed price for no reason”.
So let’s compare this to today’s SUSHI offering:
Market conditions: This deal was originally “soft marketed” to a handful of investors around June 15th. SUSHI closed that day at $9.16. Earlier discussions of a potential raise go back as far as April/May, when SUSHI was trading between $15-22. Clearly market conditions have changed since then. This deal should be pulled until market conditions improve, or be heavily revised.
Demand: We now know there is ample demand. Look at how many investors are clamoring to buy this deal – the deal is way oversubscribed. Sushiswap should now be comfortable offering this publicly to many more investors than just a small list of VCs, when market conditions improve.
Governance: Issuing a large percentage of tokens to a small, concentrated group centralizes votes further with friends of “management” that will likely support more bad decisions in the future. We see this in public equity deals all the time. One way management teams defend their governance votes is to issue a big PIPE to a “friend” that they know would vote for the board/mgmt in a contest. I see the same dynamics here – give more votes to friends at a discount with less accountability.
So the only thing up for debate at this point is “Does this new investor group provide any actual strategic value?” The history of digital assets has proven that hundreds of small evangelists and customers are worth many fold what a single private investor is worth. If the VC community really believes they add value, then they should pitch themselves to the community one at a time with SPECIFIC examples of what they will do for SUSHI, rather than read bullet points off a generic marketing pitch stating how VCs are so helpful. Then the community can vote on each pitch, and decide who should be allocated tokens in the round (i.e. syndicate the deal).
Proposal for a better solution:
Since we know SUSHI has a vibrant community, a publicly traded token, and we’ve established demand, we can go out with “price talk” when market conditions improve. Even though there is no investment banker in digital assets, and the Exchanges won’t market and underwrite a secondary offering, we can still utilize the public markets. We can set price intervals for where Sushiswap will sell a fixed amount of tokens, until the desired amount has been raised:
If our proposal is accepted, Arca will backstop the deal with a minimum purchase of $10 million at the first offering price. With this higher bid from Arca, Sushiswap would be negligent in offering tokens below this price.
Now we have established price talk and a lead investor. Sushiswap can put all three offers on Sushiswap using limit orders (3 sell walls), and provide the exchanges, the media and all SUSHI-specific chat forums with detailed descriptions of what this sale is, and how this sale will be ongoing until it is all gone. This opens up the bidding to the entire community, including these 21 VCs who are “so bullish”, only now they’re competing with each other and with every other investor for access to fixed supply at a predetermined price. Take it or leave it. If one fund wants to take down the whole round, they now have a chance to do so with no lockups.
There are no lockups on public bond and equity deals for a reason – they are completely unnecessary. If the security is priced correctly, long-term holders will hold regardless of whether or not they have a lockup or a cliff. What about Pantera’s nonsensical comment about “what price would $60mm clear if they were a seller on the order books?” First, that implies a forced seller (not the case), second, large secondary sales happen all the time and if there is sufficient demand (which there is), it can be syndicated very easily without impacting price and third, the same nonsense logic applies to buying… at what price could someone buy $60mm all at once on the screens? Obviously that would cause massive upside slippage. So if the demand is there and the selling is not forced, why not clear this supply in a more tactical manner? The most likely scenario is that there is more demand than there is supply, and many of the VCs who thought they were buying this discounted deal were selling tokens to clear room for it – well they can now buy it back at market prices that more accurately reflect the value of SUSHI or risk being underinvested to a great project. Further, if they want to earn the yield for being an active participant, they now have to actually be an active participant rather than getting free money from the Treasury staking on their behalf.
For SUSHI and its token holders, this new proposal gets a higher potential price, is no longer forced/rushed, is more transparent, and brings in an even more diversified investor base. It also proves a new concept of token sales – telling the market the price in which the community is comfortable selling, and leaving it there for investors to buy when they want to, in the size they want to, until it’s fully sold and allocated.
What else should be considered?
Time - one reason for doing a syndicated deal at below market prices is simply to get the deal out of the way and move on. There is merit to doing a deal, and being done, rather than a constant overhang. That said, the overhang from this deal and the constant yield farming unlocks have been ongoing for months. The ability to move quickly is gone. Now, with transparency and no time concerns, I see this as being a low risk.
Value – Selling tokens at a significant discount to present and future value is very costly to current token holders. At SUSHI’s current price, ~11.1mm new tokens must be issued to raise $60 million at the current 30% discount to TWAP ($5.36 as of 7/16/21), which is near 6-month lows. Our proposal has an average price of $8.53 to clear the $60 million raise, and releases only 7.1mm tokens. Our proposal saves Sushiswap $22.6mm dollars and releases 4mm less tokens saving SUSHI holders from additional dilution. Additionally since the current proposal stakes the tokens sold, xSushi circulating supply would be inflated by 18.05% overnight. Our proposal would mitigate that, something we see as valuable with current yields suppressed.