Can you explain this idea a little bit better?
The defender is the NYYC, so that regatta to determine the defender would be what? I mean what would be the contenders?
I'm not sure exactly when it started, but at least in the last few AC regatta's hosted by the NYYC. The NYYC held a regatta to pick the defender of the cup. There were usually a few boats that vied for this honor. Most if not all the boat in the defender regatta were sponsored by individuals or organizations that were not affiliated with the NYYC. (I don't know if they had to become members of NYYC or not, but I don't think so.) I think the defender regatta was open to all boats that qualified as "US" boats under the rules in place at the time.
A similar regatta was held for all the non-US boats challenging for the Cup. I believe the first challenger's regatta in this series was well before Luis Vitton began sponsoring the challenger's regatta.
This is how the NYYC kept the cup for so many years. It was not necessarily a NYYC funded defender that would defend the cup. In effect the NYYC was putting up the best US boat and using it to defend the NYYC's right to the cup.
I think, under the deed of gift if the challenger does not agree to the format established, the challenger of record can do what Ellison did and challenge to a no holds barred race to control the cup.
If I screwed up any of this explanation, I'm sure someone will be more than happy to tell us I scewed something up.