The Bear Market Republic

With the credit crunch on in full force and the California state budget still in limbo as usual, there's a distinct possibility that CHSRA will be shut down for an indeterminate number of weeks Real Soon Now(tm). This raises a simple question: can HSR supporters do anything to keep the Authority's lights on in 2009? Perhaps there is.

CHSRA has always looked to the private sector for a slice of the total investment in the HSR project, it's a key aspect of the 2008 Business Plan. Given the scale involved, they naturally looked to institutional investors as well as vendors for that money. Given the economic environment, they have put efforts to secure private investment on the back burner to focus narrowly on federal dollars.

So far, CHSRA appears not to have gone through the simple legal process of setting up a California C Corporation called say, FlyCalifornia, with say, one billion shares gathering dust in the virtual closet. Doing so would enable the authority to sell equity in the project. But who would buy any of that equity in this economy?

Well, actually, how about YOU? After all, it was you, the people of the Golden State, who voted for the HSR project in the midst of a recession. Why not give you an early opportunity to make a personal investment in it as well?

Let's say CHSRA decided to seek an initial round of financing involving say, 10 million shares at a nominal unit price of say, $30. That would represent just 1% of the total number in the closet. However, the corporate equity would relate to all of the infrastructure to be created by CHSRA, i.e. the starter line plus the phase II spurs plus trainsets etc. There's risk in investing early, but also reward: the total dollar value of the complete project is estimated at $45 billion (in 2008 dollars) and may well rise. In that sense, a price point of $30 a share right now would represent a fairly sweet deal.

Every household in the state would receive a regular investment prospectus in the mail - with additional ones available at city halls, post offices, libraries and on the internet (print-it-yourself) - that would give the residents a chance to purchase a number of shares. The prospectus would spell out the risks and rewards as usual for share offerings. To keep things simple, the purchase options would be 1, 2, 5, 10, 20, 50, 100, 200, 500 or 1000 shares per application. The larger bundles would come with volume discounts, so a bundle of 1000 shares might only cost say, $24,000. Individuals could file multiple applications, as long as the second and subsequent ones were for 10 or more shares. Individuals or businesses interested in purchasing more than 1,000 shares would be asked to contact CHSRA directly, either during or after the initial offer period.

In addition, applicants could decide to purchase ticket vouchers between any two HSR stations on the starter line at the price advertised on the CHSRA web site at the time of the offering (and itemized in the mail drop). Vouchers would be redeemable within the first 24 months of operation of the segment in question, whenever that turns out to be. Alternatively, holders could use them as a regular gift card for general merchandise from the company at any time prior to expiration.

All vouchers requested in a given application would have to be for the same origin and destination and, their total face value could not exceed the amount invested in shares in that same application. In addition, an upper limit of $1,000 worth of vouchers per person would apply, irrespective of the number of applications filed. An offer of inflation-proof advance ticket vouchers would complicate processing but also blunt opponents' argument that fares will end up being much more expensive than currently advertised.

If someone decided they wanted to submit an application, all they'd need to do is check the box next to the number desired, select the number and type of vouchers desired (if any), sign the document to approve all the inevitable legalese and, attach a valid check from a California bank (or US mail money order) for the full amount due. Purchases in excess of $10,000 should be accompanied by a bank check rather than a personal one. Credit cards would not be accepted. The signed application, check and a self-addressed envelope (included in the mail drop, marked postage paid) would be packaged up in an envelope (also included, marked apply postage due) and sent off to CHSRA.

The applications would be processed in the order received, provided they are postmarked no later than a given day, e.g. 30 days after the mail drop goes out. In the event demand exceeds supply, only applications postmarked no later than the day of the last regularly processed one would be retained. In this scenario, more than the originally intended number of shares would be sold. All other applications would be declined and returned with the checks voided.

Otherwise, purchase certificates would be printed (one for shares and one for tickets, if any) and mailed out as soon as the check clears. Bouncing checks would be handled as usual. Bulk purchases worth $1,000 or more would be sent via US mail, courier service or made available for ID verified pick-up in Sacramento, as requested by the applicant.

If CHSRA could not sell all 10 million shares, that might still be fine. After all, it doesn't need on the order of $300 million in 2009, even half that much would see it through the year. Admittedly, processing an application for just a single share might well cost $30. However, it would at least create some temporary jobs and more importantly, a mailing list. It would also give California residents a chance to own a small, tangible piece of the HSR dream many years before it becomes reality.

Shares would initially be traded privately by joint notification of a brokerage to whom CHSRA has subcontracted the relevant accounting, i.e. industry-standard processing fees would apply. By contrast, ticket vouchers would be gifted or traded directly between private partners. Anonymous trading on an established exchange floor would not be possible until a regular IPO much later in the project's gestation. This is consistent with how angel investors buy stakes in start-up companies, though they usually don't have to wait nearly as long for their payday.

Any takers?