Key Points
- DATs — public companies formed or repositioned primarily to hold cryptocurrencies as reserve assets on their balance sheets — have become increasingly popular.
- DATs provide institutional investors with a novel alternative for portfolio diversification and can serve as a potential hedge against inflation and fiat currency devaluation, while also offering the protections associated with public company regulation.
- Common instruments used for DAT capital raisings — convertible notes, preferred stock and common equity — each present unique commercial, legal and structural considerations that deal teams should consider addressing early in the transaction process.
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The Emergence of the Digital Asset Treasury
Digital asset treasuries (DATs) — public companies established to hold cryptocurrencies as reserve assets on their balance sheets, and companies that have repositioned themselves for that purpose — have become increasingly popular.
Similar in concept to corporate treasuries that hold gold or foreign reserves, DATs apply traditional balance sheet management and capital markets tools to digital assets such as bitcoin, ether, solana and AVAX. For institutional investors, DATs provide a novel, regulated alternative for portfolio diversification and can serve as a potential hedge against inflation because they offer exposure to asset classes that are largely uncorrelated with fiat currency-based investments.
A more positive regulatory posture toward digital assets in the U.S. has ushered in a new model whereby the traditional capital markets are used to fund the long-term accumulation of cryptoassets. DATs are accessing the capital markets with traditional products such as convertible debt, preferred stock and common equity as a means of raising capital to invest in digital assets.
However, structuring, negotiating and executing these transactions presents unique commercial and legal challenges for capital markets advisers and management.
DATs Securities
Convertible Debt: A Hybrid Approach to Crypto Financing
DATs issuing convertible debt can appeal to investors seeking digital asset exposure coupled with downside protection and equity-linked upside. Issuing convertible debt can offer DATs the opportunity to manage dilution while obtaining flexible leverage and accessing a new investor base.
- Structure. Convertible debt offerings can be differentiated through tailored valuation caps or discounts, as well as flexible conversion triggers, which may be time- or event-based (e.g., triggered by a subsequent equity financing), either at the option of the holder or the issuer.
- Interest and maturity. Depending on the volatility of the underlying digital asset, the coupon payments can be structured as fixed or variable, and can be paid in fiat currency, in kind (i.e., the issuance of additional convertible debt instruments or underlying equity securities) or in the underlying digital asset.
- Collateralization. The granting of security interests underlying the convertible notes can be customized to match the volatility of the relevant digital asset. Security interests could, subject to evolving rules, feature perfected liens, specified custody arrangements or enforcement and release mechanisms tied to the market value of the digital asset. Such security interests may be interchangeable between fiat currency and the relevant digital asset.
- Covenants and restrictions. While covenants and restrictions tend to be minimal for convertible debt, they can be drafted to tie to the underlying cryptoholdings. Considerations may include maintaining minimum treasury levels, permissibility of yield-generating activities and general risk management.
Preferred Stock Offerings: Flexible Capital for Digital Asset Strategies
Preferred stock typically couples debt-like features, such as fixed payments and enhanced liquidation priority, with certain equity-based reserve voting and governance rights. It offers DATs additional leverage-free flexibility in accessing the capital markets.
- Structure. The issuer may structure preferred stock as perpetual and/or redeemable, with forced or optional conversion into common equity. Terms can be tailored based on investors’ needs for liquidity and the DATs’ flexibility in light of the underlying treasury asset’s performance.
- Dividend mechanics. DAT preferred stock offerings typically include a fixed dividend, which, similar to convertible debt instruments, may be paid in fiat currency, in kind (i.e., the issuance of additional preferred stock or common shares) or in the underlying digital asset, at the issuer’s or the holder’s election. Dividend deferrals may be structured either to result in compounding or to step up the dividend rate following a specified deferral period.
- Liquidation preferences. Liquidation preferences or redemption prices may be set with reference to the performance of the underlying digital asset.
- Voting rights and governance. While preferred stockholders do not typically receive voting or governance rights, a key consideration is how to allocate control and influence generally (or in the event of a default or payment deferral), particularly in a company whose primary asset is nonoperational.
Common Equity Offerings: Direct Exposure to DATs
Common equity offerings provide investors with direct exposure to the underlying digital asset.
- Structure. If eligible to use a shelf registration statement, DAT public equity offerings are commonly structured as at-the-market offerings or, if ineligible, as equity lines of credit. In each case, these structures are used for continuous capital raising to fund cryptocurrency acquisitions. Alternatively, underwritten, marketed offerings may be ideal to manage market perception and dilution given the high volatility of digital assets.
- Valuation and pricing considerations. The relationship between the market capitalization of DATs relative to their market net asset value (mNAV) — the value of their underlying cryptoholdings — adds a novel aspect to pricing considerations compared to traditional treasury vehicles or passive exchange-traded funds.
- Disclosure. If any proceeds will be allocated toward yield-generating activities or broader decentralized finance (DeFi) participation and not just to pure strategic holdings, DATs should clearly outline and disclose their deployment strategy, including the allocation of proceeds between reserve accumulation and any yield-generating or DeFi activities. Other critical disclosure considerations include the unique risks associated with DAT holdings, such as custodial relationships, accounting classifications and concentrated dependence on underlying asset performance.
Final Thoughts
As DATs increasingly tap the capital markets, advisers and management should align financing structures with both the performance characteristics of the underlying treasury assets and the issuer’s broader liquidity, governance and capital allocation strategy.
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This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.