Introduction to Alternative Investing

Calum Johnson: Hello, everyone. Welcome to Alts, my name is Calum and I’m your host. This show is all about alternative investing and emerging trends happening at the intersection of culture and investing.

We have a very exciting show today because we're going to be giving you a bit of a preview of how alts investing is going to work on Public. So to be clear, alts won't be launching until later this month, on Public, but we thought it made sense to start educating our community on the details of how these new assets work on the public platform. Because it's quite a new product that differs in many ways from stocks and crypto, that you're all familiar with. So to that end, we've brought in Keith Marshall, who leads the alts team here at Public to break down everything for us. Keith, welcome to the show. Can you give the audience a quick introduction into who you are, and then how you got into alts?

Keith Marshall: Sure, thing. Thanks, Calum. Great to meet everyone. I'm Keith Marshall, the GM of the Alts team here at Public. I'm an attorney by trade and was the General Counsel at Otis, which I'll talk more about in a minute. I also happen to personally love all things alts though from art, to wine to NFTs and pretty much anything in this category. I've collected wine and art for years now. The wine collection is small, and I mostly enjoyed drinking it, but that's beside the fact. On the NFT side, I've been playing around for about two years now and I'm pretty deep in crypto as well.

I can and do talk about this stuff literally all day. So I'll do my best to keep these responses to the point as best I can. I mentioned Otis, though, as a reminder for everyone, Public acquired Otis earlier this year. And it's an incredibly exciting new chapter for us where we're basically taking the vision of Otis and bringing alts to a much larger audience here at Public. The acquisition is overall part of Public’s strategy to redefine the modern portfolio and make public markets work for everyone.

Calum Johnson: Okay, amazing. Thanks for the intro. I want to start here and just with understanding the assets themselves, and what the Public community will actually be able to invest in. So when we talk about alternative assets on Public, can you just give us a bit more detail? What type of assets are we specifically talking about?

Keith Marshall: So as a category, stepping back, alternative assets generally refers to anything besides extreme exchange listed stocks, ETFs, bonds, cash and sometimes crypto. On Public specifically, though, alts is a much narrower subset. They are securities that represent fractional ownership of assets like art, collectibles, and NFTs. Broadly, we call them cultural assets. Over time, though, the goal is to broaden our categories available for investment to include a much more diverse selection of alts on Public. We plan to look at things that produce cash flows, like music, royalties, real estate, we might even do things like private equity and venture capital. But again, a super important reminder on Public, these are actually interests in a legal entity that owns an asset, not the assets themselves, like you might see on Stock X.

Calum Johnson: Super cool, and especially when we start talking about real estate and music royalties, I think it really gets cool, and it gets very exciting. I want to take it even a step further back. Why would people potentially be interested in investing in these types of assets? Why should they make it part of their portfolios?

Keith Marshall: So alternative assets are increasingly becoming part of a modern diversified investment portfolio. Historically, this has mostly been led by high net worth individuals, even back to a 2020 survey shows that they allocate around 5% to collectibles alone, and even bigger numbers to private equity and real estate. So our goal is to bring some of these assets to a much broader group of people, not just that super small .01, .1% of the population.

And the reason for this is that alt assets have historically performed pretty well over time as compared to the S&P. The lawyer in me is screaming past performance is not indicative of future results. Sorry, had to say that, but timing is everything here. Anyway, there are a growing number of sources too, that just point to certain alternative assets having really low correlation with traditional asset classes, meaning they're again part of a diversified investment portfolio, and some can even be seen as a hedge against inflation, partially through diversifying your portfolio. TLDR - you should never put all of your eggs in one basket and alts are a different type of egg that you can put in your basket If it fits for you.

Calum Johnson: Okay, perfect. And I love that you always have the lawyer hotline as well. I'm curious from a legal standpoint, how did these once these assets are acquired? How do they actually become investable shares that are then accessible to the public community.

Keith Marshall: The term fractionalization is thrown around pretty frequently. But the concept really means for us holding an asset in a legal entity. So to start, we're identifying and potentially securing or purchasing a specific asset or group of assets that can be outright purchase, consignment, or even just identifying a broad category like floor Bored Ape NFTs.

We then form a Delaware entity to eventually hold the asset. After that asset is identified, we form a company, then we file a document, really a set of documents with the SEC, that will, with SEC approval, allow that company to offer securities representing this fractional ownership of the asset. These offering documents are incredibly robust include pages and pages of risk factors and things about the investment itself and investing in alts generally. So you've got this document that describes the entity, describes the asset.

The third piece is the financials, because these are again, separate companies. So each eventually gets its own set of audited financial statements. And there's even a confirmation by an independent auditor, that we actually hold the asset we say we hold. And it's worth mentioning that you may have read about fractionalization through NFTs, for example, like buying an NF t that represents a fractional portion of the trading card. This is not what we're doing. I would strongly caution investors to do a ton of research, because those particular assets might not be going through the U.S. securities law framework, which adds a huge layer of risk. Instead, we're going with a more tried and true path that has the SEC putting their eyes on things.

Calum Johnson: Great - and I definitely echo that. Always do your research before you get involved with anything like this. I want to step into the shoes of the Public member who's considering potentially investing in an alt when they become available on Public. I'm curious - so when you invest in an alt on Public, what is it that you're actually investing or buying shares into? Can you just give a bit more detail on that?

Keith Marshall: Sure, it's a similar concept to buying a share of Tesla or Apple or Google, except that it happens to be a legal entity tied to a specific asset. So as I mentioned before, you're buying securities that represent a fractional interest in a given asset, not the asset itself. In our current structure, you are technically becoming the holder of membership interests in a limited liability company.

For ease, I'll call the shares and the company I'll refer to interchangeably as an asset, mostly because aside from me, most people think of the underlying asset, like Shattered Backboard sneakers, not the name of the legal entity. So the sole purpose of that legal entity is to hold this actual asset. And to drive this point home as best I can, a great example is you can't exchange the shares you hold for the asset itself, you are literally holding a legal interest in the entity that holds the asset.

Calum Johnson: Okay, perfect. And thank you for that context. I know, even when we were at Otis, and now coming over to Public and alts coming to Public, a big discussion is around liquidity around alts. So can you just give the audience and everyone a refresher on, first of all, what is liquidity? And then why is it important to think about liquidity when it comes to investing in alts on Public?

Keith Marshall: So I'll step back even higher at first. I mean, the main point of the acquisition of Otis by Public was to increase liquidity overall for the specific asset classes. So liquidity is basically the speed and ease with which you can exit a given investment. Basically, how can you get the cash value of your investment? Or what is your ability to convert the shares you hold back to cash quickly and at a price that's acceptable to you? We generally talk about liquidity from the sellers perspective, although of course liquidity affects buyers as well because it means there needs to be liquidity for you to actually buy something and enter a position.

So an asset like an exchange listed stock, like a Tesla, or Google that you'd find on NASDAQ, or the New York Stock Exchange, those are highly liquid. Those are large markets with tons of participants, all across different platforms. Conversely, you have assets like private equity interests, they're highly illiquid. There's generally no market for investments like that, and you may not even have a means to sell them outside of the fund being wound down, for example.

So for alts on Public, the market is limited to Public itself, meaning members of Public are buying and selling amongst each other. This is really different from exchange listed stocks, and even crypto where there are marketplaces outside of the public ecosystem. This means that, you know, alts on Public are going to have lower liquidity than traditional exchange listed stocks. But again, the hope is for Public to make these asset classes substantially more liquid than before, and bring these markets to a much more mature level than they are today. On an asset by asset basis, you'll also see varying levels of liquidity, depending on public members willingness to buy or sell.

Calum Johnson: Okay, perfect. And I think, to your point, it's something that's very important for Public members to consider when they're investing in alts is, does the liquidity fit with the time horizon and their investment goals? That's something to consider before you get into it.

Okay, great. So we've kind of covered the big picture things. I'd love to get more into the nitty gritty logistics of how Public members will actually be able to buy and sell shares and these assets on the app. So could you kind of just give us an overview of the different stages of the investing process into alts?

Keith Marshall: For sure. So first, there's an initial offering, which I briefly mentioned before - at that stage, you are purchasing shares directly from this company that holds the asset, there's one price and a set number of shares are sold at this given price. Then we go through a four to six week administrative closing period, where we take all of the investments in the initial offering, tick and tie everything together, and officially close it in air quotes. So the securities at that point, can be bought and sold between public members in trading. And trading between public members just means that people are literally buying and selling amongst each other. This is what we will be launching very, very soon in the next few weeks. Initial offerings will happen on the Public platform, hopefully later this year or early next year.

Calum Johnson: Okay, nice. So you really alluded to it, but just to make it clear for everyone, the first alts that are offered on Public are not going to go through the initial offering process, but going to open directly for trading.

Keith, can you kind of just explain some of the thinking behind why that is?

Keith Marshall: Absolutely - and great point to drill down here. Each asset that's going to be available for trading already went through the initial offering process on Otis. So basically, that initial first piece, the initial offering, has already happened in the past dating back to 2019 for the earliest, and is now being brought over to Public from the Otis ecosystem.

So on day one, any shares that are available to purchase are basically owned by individuals who invested through the oldest platform. Since this will be trading, not initial offerings, prices won't be fixed and can honestly vary minute by minute. One other important thing to note here, we're actually in discussions to bring similar third party assets to the platform for trading, which would be pretty exciting to again, add to the diversity of offerings on the platform.

Calum Johnson: Okay, amazing. Since the trading process, I think it's a bit different than what you see with stocks and crypto, I think that experience will be slightly different for users. Let's really kind of drill down more into it.

So at a high level, can you kind of just explain how will members use the app to buy and sell shares in alts? 

Keith Marshall: The overall experience is similar to exchange listed stocks and crypto especially if you've traded crypto on an exchange before. The big difference being members are buying directly from each other, which again affects liquidity. The experience itself will have some slight nuances, though mostly tailored to these being slightly different types of securities. So to start, you enter an order to buy or sell. You're going to put in the price you'd like to pay or receive, and the quantity you'd like to buy or sell. If that price is agreeable to someone who wants to put in a matching, buy or sell, the trade clears cash and shares change hands, and everyone is hopefully happy. If there's no match, like if your price is too high or too low, the order will stay on the order book, and basically not be cleared.

So an example is like, let's say I want to buy a share for 1 cent, no one's willing to sell for 1 cent, my order stays on the order book. This process is actually what happens with traditional stock market exchange listed securities too, you just don't notice it, because the volume of orders in that market is so much higher. And it's similar, though still, because just because you want to buy Tesla for $1 doesn't mean anyone else is willing to sell at that price. So the difference here is that with this limited liquidity, you may or may not be able to buy or sell the quantity you want at the specific price you want.

Calum Johnson: Okay, Keith so I'm going to throw a bit of an alternative scenario your way and you can tell me what would happen in this case. So what happens if, for instance, a bid price that's higher than any of the ask prices is higher than any of the ask prices on the book? What would happen in that scenario? How would it be made?

Keith Marshall: So it is a traditional limit order book, but we have what's called best price execution. So rephrasing, you put in the highest price you're willing to buy, or the lowest price you're willing to sell plus a quantity. That doesn't mean it actually executes at that price, though. So say, for example, that someone's willing to sell one share for $100 and ask.

If you're actually willing to purchase for up to $125, and put in a bid for $125, you'll still get the best price, meaning the trade actually clears at that $100 that someone is willing to sell, not the $125 that you'd be willing to pay. Put differently, again, prices don't have to match exactly, they just have to cross. That's what limit order means. It's the max limit in which you're willing to buy in the min limit you're willing to sell.

Calum Johnson: Okay, nice. So so taking all of that and that nuance, how does that translate into some of the ways that a Public member can use the information that they're seeing on the order book, when thinking about an asset they want to invest in?

Keith Marshall: The ability to buy and sell depends on both price and quantity. So it really goes to your goals and specific timing needs. If you want to buy or sell immediately, you need to look at the order book and say, am I willing to transact at the price that's readily available? Because basically, you need to match an order that's already in the order book. And even then you might not get the quantity you want. So a concrete example, say you really want to buy one share of the Shattered Backboard game worn Jordan sneakers. There's an ask for one share on the order book for $10. That might not be the best price, for example, the last share might have sold for $7, but you could buy it immediately for $10, and you might do so if you wanted to buy 10 shares, you could still only get one share at that $10 price sale.

So the order book plays in here by giving you kind of a live view and how other people are willing to transact. And alongside that, transaction history helps you see where people are actually transacting. If instead, your goals are a little different, you don't need to buy or sell immediately and are more focused on price, then you can use the order book to gauge demand for the given price. So for example, let's say most people are selling at $10, you're only willing to sell for $100, so it’s probably fairly unlikely there's going to be a willing buyer, given that everyone else is willing to sell at $10. The same would be the case on the flip side, if for example everyone's selling at $10 and you're only willing to pay $1. There's just not going to be enough liquidity at the given price and quantity.

Calum Johnson: Okay, great. No thanks, Keith, for explaining all of that. I think that's really helpful information. And for everyone in the audience,I know that we're throwing quite a lot of information your way. There will be an FAQ available on alts, which will kind of explain everything and reiterate everything that Keith has said and mentioned in this episode. We’ll also be doing a second Public life in a couple of weeks, which will be giving everyone more of an intro into the assets themselves, so that will be opening on Public for trading initially.

But I would like to talk a little bit about some of the behind the scenes regarding the actual assets themselves from acquisition to how they're handled. So Keith, maybe we can start here, which is, first off, how does Public even acquire these assets in the first place?

Keith Marshall: So it's easy to get super bogged down into securities and trading and all that stuff. This side is the fun part. And what's really exciting in our business, and it's really, because high quality alternative assets are just difficult for most people to access. And it's mostly because of price and also scarcity. 

Taking wine as an example, some of the best wines, it might be $100,000, or more for a single case of wine. For great art, it can be over a million. That's things that normal people really just can't access at all, even if you can find one, you probably can't afford it. And one of the main functions of the alts team here at Public is this platform supply, which is run by my colleague Leah. So we work with a network of collectors, auction houses, galleries, and different providers in various categories to find these specific assets, and vet the quality. So we're also looking to work with partners that hold assets already or have deep expertise in a specific category, like wine or real estate being two good examples.

Calum Johnson: Yeah, and I think to your point, it's one of the really cool aspects about what we're doing, which is making these assets which could potentially be worthwhile investments for people. Of course, that's not investing advice, making them accessible to a wide variety of people. You kind of spoke about the acquisitions, how that's the fun part of what we do. What does Public look for when we're considering assets for potential acquisition?

Keith Marshall: We generally look at a category by category level, and look for things with established collector bases, strong sales history, that typical stuff like art, wine trading cards, comic books, luxury handbags, video games, even sneakers. Basically, there's an existing market for them and data to back up sales in that market. So the key point being public sales data, because this is super helpful for us as we look to gauge pricing and these assets we're looking at. And we're usually evaluating for three particular things: cultural significance, scarcity, and price. And these are all generally important for return potential, returns, of course, number being guaranteed, but there's varying parts to them that affect price.

So a great example is the shattered backward sneakers that I mentioned, which were game worn by Michael Jordan. They actually embody all three of those really well, because the shoes represent a very iconic moment in sports history, when Jordan shattered the backboard from a dunk during an exhibition game in Italy. And there's even a piece of the glass embedded in the shoe still, which is just super cool. So there's your cultural significance. It's a key moment in sports history. This also happens to mean there's built in scarcity. It's a one and only asset because Jordan wore these shoes during the game. The downside to that and incredibly high scarcity is they can make price determination tougher. Scarce, your assets, of course, tend to command higher prices so it is a very key factor. This asset, though, again, benefited from a prior auction sale. So we actually had a market driven price on which we can base our acquisition, because we never want to overpay for an asset, because that'll affect investors returns if we eventually do sell a specific asset. So all three factors play into whether something is a fit for our platform as a whole. Again, by no means should this be considered a recommendation to invest in any of these or the Shattered Backboard.

Calum Johnson: No, I think that's great context. And I think it's also helpful even just seeing it behind the scenes, how rigorous that process is of evaluating whether an asset would be a good acquisition. Let's go and talk about what happens post acquisition. So can you kind of just go into a bit more detail about how the physical assets are managed after they've been acquired?

Keith Marshall: Condition is absolutely critical for these assets. So we take asset management incredibly seriously. And we're not just throwing these things in a corner of the office, there's incredibly robust protocols for what we're doing with these. Physical assets are securely shipped to specialized storage facilities that know how to deal with these things. So for trading cards, that's PwCC in Oregon. For other assets, like art and sneakers, that's Uovo, which is a fine art storage facility, with a location on Long Island City that we use. And each has their own security protocols, temperature and humidity controls, trained staff members, it's basically the full package to make sure that these assets are kept as best they should.

Our physical assets are also covered by insurance during transit and placed in storage facilities. So we're taking steps to make sure they're safeguarded in real life. And in terms of value. Intangible assets, like NFTs differ slightly. In part, there are no insurance products available yet for some of them. But we do use industry practices such as you know, using a multifactor Gnosis safe to hold NFTs.

Calum Johnson: Okay, nice. And I think once you once even you keep talking about the process that we go through in the research that we do, to first acquire the assets, and then everything that happens around storing, and the logistics and the insurance of the assets, you start to see why investing in these sorts of things, has historically been quite inaccessible, which I think is why it's why it's so powerful and why it's so cool what we're going to be able to do here.

Before I get to the final question, just a reminder for everyone in the audience, there will be an FAQ, once alts are launched, which kind of explains and reiterates everything that Keith has said. So no worries if you've missed it.

Okay, so on the final point, I understand that every asset also comes with a document called the “offering circular.” Can you just explain to the audience? What is the point of offering circulars, and why might an investor want to read them?

Keith Marshall: Sure. So the offering circulars is an investor's best resource. And it's the foundation for diligence in one of these investments. The offering circle is actually part of the initial offering process, so it's the main thing that gets filed with the SEC. But the info is still relevant for those participating only in trading because it describes the legal entity, the asset itself, and even the management of the asset.

The offering circular is basically a very long document that details all sorts of information, you might need to know about the company, the asset, Public itself, how we deal with the asset, how we store the asset, what our insurance protocols are, and most importantly, providing a substantial list of risk factors that describe things that could affect your investment in an asset like this. So it's a really important document to review if you're considering investment, and we provide links in app to the offering circulars for particular assets.

One thing I'd like to call out those, these are point in time documents - they're made for the initial offering. So we do file periodic updates on the SEC EDGAR website, along with these up to date financial statements like semi annual unaudited financial statements, and audited annual financial statements. So there's additional information available online.

Calum Johnson: Yeah, so definitely encourage everyone to take a look at one of those. Thank you so much, Keith, for joining us on the show today, your first alts show. I’m sure there'll be a few more.

For now, for everyone in the audience. The big thing to remember is that alts will be coming very soon, later this month on Public, so keep an eye out there. We're really excited to be bringing these assets to everyone and allowing everyone to start investing in everything. Thank you, everyone for joining us today. Have a good one.