Transforming Capital Project Funding
Over the last few years, I have been following the media coverage about a national sports team’s efforts to build a new facility in a major Canadian city. The story played out a predictable and now cliché pattern of back and forth public bickering between a city with heavy bureaucratic inertia and a team ownership group that alienated fans by making threats to leave. Having lived in the city, I understand the team’s real cultural value to its citizens, whom deserved better than to hear threats of the city’s marquee sports franchise leaving. I believe that we as a civilization now have the knowledge and tools to build solutions to fund sports facilities, infrastructure and other capital projects in a way that will be a win-win-win for the citizens, unions, cities and (clean) global capital looking for solid long term investments to land in.
The situation played out like a broken record: Sports team with old arena seeks upgrade from 70’s or 80’s era facility. City offers significant amount of money, but funding remains insufficient and the project reaches an impasse. This is often followed with threats of the team leaving to another city where a newer facility already exists or sufficient funding for a new facility is being offered.
This scenario has played out in many North American cities that have (or had) professional sports teams in the NHL, NBA, MLB and NFL.
Imagine instead of this cliché series of events, where instead of the inevitable bitter stalemate, we could use some new technologies to make it easy for the people, businesses and unions of a city to invest in, participate in, and profit from a project that they have an emotional stake in.
Cities are infamous for having to cut major services at various times in their existence. As it stood, the arena project had a $150m gap in the $500m budget, due to the negotiations over how that money will be paid back to the city. Therefore in general, it is safe to say when this city said “this is all we can afford to spend,” they had probably done their job and spoken to the relevant departments and their counterparts in other cities that have gone through the process, as well as academics that have studied these exact issues at length. So in this case, the city was probably right, as was the ownership — even though the team may or may not be able to fund the rest, and was probably being frugal, as businesses often act. (The team was/is suffering from some of the lower revenues in the league and receiving subsidies under league agreements.) An arena that can allow for modern high end offerings like more executive suites and 2000+ extra seats, can deliver revenue and value to the team and local social, financial ecosystem beyond the prime tenancy. At this point, the traditional financial mechanisms of capitalism provided few reasonable paths forward, leaving all stakeholders in the above mentioned cliché wasteful public disputes as previously described.
Without getting too deep into the specifics of how the deal can be structured, I am simply presenting that organizations are now capable of accessing a much larger pool of capital, as there are many individuals and institutions that would love to participate in these kinds of investment which has stakes that go beyond the cold numbers the city and team must morally live by. I am not suggesting that this be a charitable fundraising effort either. As demonstrated by the building of the Air Canada Centre in Toronto, and the sale of its parent company Maple Leaf Sports entertainment, this type of ownership can be conservative enough for the Ontario Teacher’s Pension Fund to invest in. As indicated by MLSE’s purchase by the two largest telecommunications companies in the country, there are corporations that profit off of sports teams through broadcasting and other revenue streams that are so eager to participate in sports entertainment that they would even team up with their arch rivals to have a chance to do it.
By now, reward crowdfunding like Kickstarter and Indiegogo has mainstream awareness, if not adoption. Equity crowdfunding has followed the advent of reward crowdfunding, and is different in that it makes it possible for the public to fund a new business, and receive a proportional ownership stake in return. This second form of crowdfunding has not matured as quickly as many have hoped.
The Initial Coin Offering (ICO) is a new framework for raising money for projects, companies and more. You’ve heard of Bitcoin, and it’s okay if you don’t understand the details of blockchain or cryptocurrency. The technologies and use cases are so new, that there are still few that can claim expertise in the fields, I certainly do not. For the sake of this case, I will describe an ICO as being like a stock, that is detached from the volatility of a stock market, and represents a highly automated, digital, trustworthy, and liquid method of raising money and exiting when you want. Beyond the initial period in which the “stocks,” which will be referred to as tokens are sold, owners of those tokens can receive dividends or a profit share of the ongoing business and the ability to sell not only full tokens, but fractions of tokens.
In contrast to how many ICOs are perceived to have raised tens of millions of dollars in only a few days, significant amounts of tokens have been typically reserved ahead of time between the issuers and large private investment firms.
A July 2017 decision by the SEC to start regulating ICOs has in many ways, ruined some of the initial potential of ICO’s and cryptocurrencies. Now, on the other hand, it has provided us with a dumbed down version that is as beautifully simple, easy, and isolated as I described above. The legal decision means that we can now start to experiment with various ways to use cryptocurrency technologies without the uncertainty and risk of operating outside of tax codes. In the case of funding a new arena in a city, an ICO could be set up in multiple ways.
Without diving into more than one way that an ICO can be structured in this particular case, I will suggest that the power of this approach is capable of enabling any combination of government, small to large businesses, unions, investment funds, and individuals to invest in a new arena. The reason this is now possible is due to the underlying simplicity of applying the basics of seemingly complicated blockchain technology to a simple digitized asset, a token, that will always be regulatory compliant. Another element of this mechanism is that it is possible program in a local majority ownership to citizens of a city and at the same time, provide an attractive and safe investment for the global mobile capital that has already invested billions in Canadian residential real-estate.
If this all seems unrealistic due to massive legal risk, you would have been correct in early July 2017. Since then, companies such as iComply are deploying regulatory compliant ICOs through platforms that will allow lawyers across the globe to help businesses to digitize current assets into tokens, or raise funds for new projects through ICOs. One of the unconventional benefits that can come from this new wave is to provide opportunities to open up or close off investment to projects in order to reduce the negative outcomes we can see from our current reality of globally mobile ‘dirty’ capital. In the case of an arena, local stakeholders will be willing to risk holding a weaker investment as it can contribute to aspects of their community that have value beyond finance. The arena example would also be a good candidate to take advantage of money from any global investors, if it were required to get the project funded. These global investors are automatically screened for money laundering sources allowing for public institutions to build a new level of trust from sourcing verified ‘clean money’ to drive their development.
This method will face risk, but the nature of the technology will provide a system that removes significant human error, cost and democratizes access to investment. Other examples of where I believe ICOs could be applied are to fund infrastructure projects, startups, and factories.
The following infographic demonstrates a scenario of how funds can be raised using ideas suggested above. The idea of smart contract still hasn't really seen its app store moment. This infographic assumes the emergence of a more complex ‘Programmable Non-Linear Contract’ than I’ve come across. This PNLC also implies the ability to include the ability to tie in distributed decision making software to engage public shareholders and gamification of the ownership process.
Globalization has led to a torrent of clean and illicit investment into every major city. The benefits of this investment has not always been well aligned with local interests. Re-localizing currency flows and maintaining local asset ownership may produce a smaller GDP at first glance, but the positive externalities of liveability, reduced social angst and reduced barriers to investment are likely to provide a sufficient return and a faster path to building resilient cities and economies worldwide.
Editable infographic text:
The goal of this model is to prototype a new mechanism to fund gaps in capital projects. This opportunity is by nature different than we are used to thinking about. ICOs are a new form of mutual contract, whereas we have always relied on a collaborative approach to trust, we now have a way to manage a co-ordinated approach. On top of this, smart contracts allow for non-linear contract writing that allows for the creation of conditions, and a way to plan and execute in ever more complex social and technical landscapes.
ICOs also create new opportunities to fund value added amenities to the project that would otherwise be ‘nice to haves,’ such as better than LEED Platinum features, which further drive down lifetime cost. Using the fractional ownership nature of coin exchanges allows contractors and local stakeholders to invest, creates new opportunities and incentives for participation in local infrastructure. Providing global money access to safe, long term investment opportunities creates a higher probability that a well planned project will be fully funded beyond basic requirements.
