Monark Monthly-February Edition

Welcome to the second edition of the Monark Monthly, a newsletter focused on private markets news and analysis. The past month brought a number of exciting changes to the industry, and created narratives that we expect to continue developing over the coming quarters. The three main stories we found interesting this month were BitGo’s acquisition of Brassica, Stockpile’s acquisition of Investables and of course the launch of SoFi’s new alternative asset offering. The underlying narratives from this month were that of industry consolidation, the benefits and pitfalls of tokenization of real-world assets, and the start of major brokerages moving into the alts space. We expect the trends of industry consolidation and major brokerage's adoption of alts to continue, as pain across direct-to-consumer alternative asset platforms will force continued consolidation, and the competitive nature of d2c brokerage platforms kicks off a FOMO effect for providing access to alts.?

BitGo’s Acquisition of Brassica?

Brassica Technologies, a Dallas based fintech start-up developing API infrastructure for custody of alternative assets, was acquired this month by BitGo for an undisclosed amount. A source close to the company indicated that the mostly stock acquisition valued Brassica at $90M, 3X their seed round valuation from 2023. BitGo and Brassica issued a statement announcing the acquisition, highlighting their commitment to developing custodial technology for both the digital/tokenized asset and traditional private securities space. Brassica’s acquisition highlights the trend of industry consolidation in private markets. BitGo has emerged as the leading digital asset and crypto custodian, recently valued at $1.75B after completing a $100M Series C financing in 2023. Many experts in the industry view the Brassica acquisition as BitGo’s hedge into traditional private securities custody, which brings to light the debate around the adoption of tokenized real-world asset (RWA) securities within private markets. Notably distinct from crypto assets & tokens, the tokenization of RWA's is an attempt to bring traditional private placement securities (Reg D, Reg A+, Reg CF) on-chain. While there are numerous efficiencies created by blockchain technology with respect to custody and settlement, those efficiencies are only reflected in the market when there is unilateral adoption of the technology, or at least when both counterparties to a trade are using the same on-chain protocol.

Tokenization of real-world assets using digital ledger technology for records of ownership, only creates real efficiency at scale, once a network effect of firms on the buy and sell side of the trade adopt the same core technology. Without industry wide adoption, the benefits of blockchain settlement technology cannot be recognized, as the challenge of intermediating between on-chain and off-chain settlement creates a whole new world of complexity. A number of web2 to web3 "bridge" platforms have emerged to solve this challenge. The CEO of one such platform, Vertalo, addressed the topic in a recent op-ed titled, "Real world Asset Tokenization is Fake News". The primary challenge with industry wide adoption of distributed ledger technology is that the technology itself seeks to disintermediate much of the traditional infrastructure that exists in financial markets today. The adoption of distributed ledger technology at scale will primarily replace the core functions of transfer agents, central repositories, clearing firms and matching engines (exchanges or ATS’s.) Without removing these intermediaries, the technology does not create additional efficiencies.

The process of industry wide adoption of a new technology that will ultimately eliminate many businesses and change the operations of financial institutions is unlikely to happen anytime soon. DTCC’s acquisition of Seccurency was widely seen as DTCC leading the charge into blockchain custody, and while there have been some examples (particularly with respect to international settlement) where blockchain technology has been utilized for real world asset transactions, the technology is unlikely to see the same level of adoption in US financial markets any time soon. Why? Well, DTCC surveyed their own constituency of broker dealers and clearing firms during their attempt to create a repository for private markets, known as “Project Whitney.” As part of that survey, the vast majority of DTCC constituents preferred to utilize the existing cloud based web2 infrastructure that DTCC already offers, as opposed to adopting a new web3 technology. Financial markets change slowly for a reason, as many of these institutions handle the savings and livelihoods of millions of Americans.?

Rest assured, we expect Brassica to continue providing valuable API-driven solutions for qualified custody, capital formation, post-trade settlement, escrow accounts, transfer agent (control location) and more, to the traditional private securities market.

Stockpile’s Acquisition of Investables?

Stockpile announced this month that they have acquired the technology assets, IP and talent of Investables, an early-stage platform democratizing access to high-end collectibles via Reg A+. Stockpile is a brokerage firm making it “easier for families to invest.” Stockpile Investments, Inc is a licensed broker dealer that clears through Apex. While the Investables website has been taken down, SEC Edgar filings show a Reg A+ offering filed in 2022 with Dalmore Group acting as the broker dealer of record. While unconfirmed, we can assume that the Investables platform was built using the same framework as Otis (acquired by Public.com in March of 2022.) This is a common framework used by Series Reg A+ issuers and emerging d2c alts platforms, utilizing Dalmore Group’s broker dealer as a service and compliance team to handle the Reg A+ offering process, and likely partnering with North Capital’s PPEX ATS for secondary trading. Platforms that have utilized the Dalmore/PPEX framework include Landa, Otis, RallyRd and others. As an early-stage platform, it is clear the Investables acquisition was primarily a way for Stockpile to jumpstart its development of an alternative asset offering, leveraging the expertise, technology and commercial relationships that Investables had developed for private placement offerings.?

This acquisition speaks to two broader themes occurring within financial markets. First, the consolidation of the d2c alternative asset space, as platforms struggle to raise additional funding without showing significant traction in their ability to acquire new customers. Second, more traditional brokerages developing private market (alts) offerings. Given Stockpile’s stated focus on long-term investing strategies for families, alternatives fit well within their portfolio of offerings. Private investments often take time to appreciate and derive real value, which is in line with a long-term investment strategy. With access to Stockpile’s user base, the Investables team will be able to develop and distribute private market offerings without the high cost of customer acquisition. For Stockpile, adding alternative assets increases the value proposition of the platform. We expect continued consolidation of the d2c alts space, potentially through acquisition by more established brokerages.??

SoFi adds Alts to the Invest Platform

Perhaps the most exciting story of the month, SoFi Invest recently announced that they are adding alternative assets to the platform. In the press release, SoFi highlighted the benefits of adding alternative assets to a portfolio, and rolled out a new education hub to help investors learn about those benefits. While SoFi's initial offerings are mutual funds and a select number of registered funds, including the ARK Venture fund and funds from Franklin Templeton and KKR, we expect SoFi to continue to broaden access to alts by including more private asset classes over time. This announcement highlights the growing demand from retail investors to be able to access alternative investments through their native brokerage platforms, a thesis and trend we expect to continue over the coming quarters. Much like when Robinhood introduced $0 commission trading, and when Crypto investing became popular, the FOMO these new products create can be contagious. Rest assured, other brokerage platforms have quickly taken notice of SoFi's foray into the alts space and are making moves to provide access to alts as well.?

As one of the most dominant players in the brokerage space with over 7M users, SoFi’s push into alts is likely the start of an industry wide trend of brokerages providing access to alternatives and private placements. In the fierce competition for investors' attention and wallet share, brokerage platforms must fight for every competitive edge they can get. Offering access to differentiated and higher yielding products is just the edge that SoFi gets by offering alts. As more brokerage platforms develop their own alternative asset offerings, we expect the brokerages clearing counterparties (i.e. Apex, RBC, Drivewealth etc…) to adopt custody and settlement solutions for private placements as well. As more capital flows into private assets, clearing firms will need to adopt new rails for custody and settlement in order to maintain capture of client AUM. In a future world where retail investors adopt a 40/30/30 portfolio of public stocks, bonds and private alts, 30% of client AUM is a valuable asset to keep under custody. We expect these incentives to drive the traditional system of custody and settlement (including DTCC) to adapt over time to provide a more seamless path for brokerages to offer alts to their clients.?

Crowdfunding Vs. Venture

As a quick bonus story, I want to give credit to our friends at 10 East for publishing a highly relevant report on the risks of investing in crowdfunded start-ups. The report highlights the difference in the success ratio between venture backed vs. crowdfunded start-ups in raising a next round of funding.

From the report:

• 22.7% of crowdfunded companies raised a subsequent round >$1.5M versus traditional VC at 44.2%.
• 9.1% of crowdfunded companies raised a subsequent round >$5M versus traditional VC at 26.4%.
• 5.3% of crowdfunded companies raised a subsequent round >$10M versus traditional VC at 16.9%.
• 2.8% of crowdfunded companies raised a subsequent round >$20M versus traditional VC at 9.7%

What this report really highlights is the adverse selection effect that many VC crowdfunding platforms like StartEngine, Republic and WeFunder are forced to contend with. In particular, with the current drawback of VC funding for a lot of direct-to-consumer platforms (particularly in the alts space), the temptation for platforms to leverage their existing user base or brand name to raise capital from retail is evident. However, retail investors should pay particular attention to whether a start-up has raised venture capital in the past before crowdfunding, if so, there’s a good chance that their VC investors already passed on a bridge round to keep the company afloat, which means the chances of that company succeeding are very low. As an entrepreneur myself, I understand the incentive for founders to keep your company alive, however, if your VC base refuses to support your company, crowdfunding retail capital only furthers the adverse selection narrative and negatively impacts the overall perception of the crowdfunding space.?