Sometimes when you are right, you can be more right.
We thought we were done.
On Wednesday, August 27th, we received what we were expecting to be our nearly final comment letter from the SEC for the initial Permuto trusts. We expected a short response – it’s very common for a handful of comments to be outstanding and resolved quickly, while the SEC gives a filer the go-ahead to proceed with effectiveness and the offering process.
The comment letter we received met our expectations as it had 7 remaining items, only 3 of which were really questions. However, the SEC also asked for a call with counsel on Thursday, August 28.
Up to that point, everything looked to be on track for a launch the week of September 8. .
In that call, the SEC has asked us to convert from a ‘33 Act filer to a ‘40 Act filer. The SEC has some concerns that, while Permuto has approached its compliance and process efforts appropriately and with diligence and rigor, other organizations following with their own products may not. Specifically, they may do things that could be unsafe for investors and consumers – and we sympathize with their concerns regarding those other future products that may attempt to take the same path as we originally filed.
As a little background, a ‘33 Act registration is sort of by right–the registrant has a right to register equity as long as they meet the disclosure requirements. The ‘40 Act is different. It’s very restrictive and proscriptive, but Congress properly delegated the power to the SEC to make exceptions to those restrictions on a case-by-case basis. Related, it’s why people who understand securities regulations often say that the SEC doesn’t actually approve an S-1, so you can’t fully infer that they agree with the legality of the contents of the S-1 under the ‘33 Act.
So, we’ve a curveball.
The SEC is collaborating with Permuto on appropriate relief so that the Permuto trusts can comfortably fit into the ‘40 Act in a similar way to the Americus Trust SCORES and PRIMES did in the 1985-1995 era. This process means that a product receiving it has had closer SEC scrutiny than a ‘33 act registration.
The downside is that completing the relief takes more time than our original launch schedule. There will be a delay before we can launch the first Trust, as the SEC has to complete its regulatory process.
However, there are critical new capabilities that this change gives us.
First, we’re going to be able to add “cash create,” where you will be able to send cash and Permuto can acquire the underlying shares, put them into US Bank, and issue you ACs and DCs. If you meet the minimums, you will also still be able to deposit shares too.
Second, there are a set of companies in the “Magnificent Seven” that we’d really like to put into our Trusts, but they either don’t yet pay a dividend or their dividend is tiny. The costs of DTC are much higher than blockchain, and our primary ongoing revenue source for the Trusts is the fee we take from the dividends. ‘40 Act status would mean that we can now go ahead and list those companies directly on-chain only. Those DCs will not be worth a lot but they are an exciting option for companies that can, and may, start a dividend in the near future.
Third, we can now, with an ETF’s permission, place an ETF into our Trusts. This means that we can make available a widely diversified DC. On our original path, we needed to wait until enough Trusts went live to create diversified bundles. We believe those native bundles of DCs will ultimately be superior, but we think it’s a big win to get diversified DCs into the market quickly.
Finally, this will also allow us to bring bonds on-chain for retail and high net worth folks. The bond market is opaque and has not had the competition in trading that has driven equity markets to $0 fee commissions. Enabling individual investors to have a direct choice with much lower fees, and not requiring a traditional ETF wrapper, can unlock an additional market beyond equities. Just corporate bonds and municipal bonds have a market size of between $15 and $18 trillion dollars. Someday soon you may be able to take your Apple DC dividend payment in Apple AAA bonds.
While we’re disappointed that we have to wait just a little bit longer, we believe the outcome will be more than worth the wait. Dunktober isn’t necessarily over. We have a few things cooking that will help the world understand how big and real this opportunity is.
Hold on tight.
