November 22, 2019 / 1:59 PM / 24 days ago

Breakingviews - Chess “hybrid IPO” is less absurd than it sounds

USA's Fabiano Caruana plays a move during round 12 of the World Chess Championship Final in London, Britain November 26, 2018.

LONDON (Reuters Breakingviews) - Chess pawns are weak pieces with lots of potential. Get one to the opposite side of the board, and you effectively add a second queen to your ranks. World Chess Chief Executive Ilya Merenzon is making a similar pitch to potential investors in a “hybrid initial public offering” of the broadcaster, which is developing an “Armageddon” chess league for TV. His ploy is less absurd than it sounds. 

Merenzon’s game plan, explained to Breakingviews on Friday, has two basic moves. First, raise “single-digit millions of dollars” through a “security token offering”. That means selling digital, share-like assets to investors whom regulators, like the Financial Conduct Authority, deem sophisticated enough to buy them. Second, float World Chess on AIM - London’s junior stock exchange for small and growing companies. Investors would be able to convert digital tokens into listed shares in the company.

There’s a danger that token-holders lose their pieces if Merenzon’s planned 2020 public listing fails, or are left waiting to cash out if it is delayed. Owners of the tokens can in theory sell them to other digital-asset enthusiasts, but liquidity will be low since the market is still in its infancy. In an extreme scenario, they could be unsellable and effectively worthless. The equity-like assets therefore merit a hefty discount.

From Merenzon’s side of the board, the strategy makes more sense. He wants cash to launch a competitive gaming service where players can improve their official rankings. But an IPO is expensive for small companies, which can’t always afford bankers and lawyers to vet every line of the prospectus. Selling tokens to “qualified investors”, as defined by regulators, is quicker and less costly. World Chess can then use some of the cash raised to float itself, giving those early token investors the chance to cash out. 

Trying to obtain funding from venture capital or other forms of institutional private equity might have been a less complicated gambit. But choosing the unconventional digital-asset route has other benefits: Merenzon’s share sale will have a much higher profile than similarly small ones from other companies. As in chess, a few opening sacrifices may secure a win in the end.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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