Tag: private capital markets

Embracing Blockchain in Private Capital Markets: A Strategic Blueprint

Thursday April 18, 2024

In the rapidly evolving landscape of private capital markets, blockchain technology emerges as a transformative force, offering a plethora of new opportunities and solutions.

This technology, renowned for its robustness, transparency, and efficiency, is revolutionizing the way private securities are managed, traded, and invested.

Through blockchain, we now have the tools to tokenize assets and offer fractional ownership in a cost-effective manner—all while staying 100% compliant with regulatory frameworks such as the SEC and JOBS Act.

This blog post explores the strategic approach to integrating blockchain in the private capital markets, focusing on the selection of appropriate blockchain types, compliance considerations, and the broad impact of tokenization.

Understanding Blockchain and Private Capital Markets

Blockchain technology, at its core, is a decentralized ledger that records all transactions across a network of computers.

This technology ensures that records are transparent and tamper-proof, making it an ideal candidate for use in areas requiring high levels of trust and verification, such as the private capital markets.

In these markets, blockchain can manage the activities of buyers and sellers of private securities more efficiently and transparently than traditional systems.

The Revolution through Tokenization

Tokenization is the process of converting rights to an asset into a digital token on a blockchain. This can range from RWA, real estate, to shares in private companies, to artwork.

The benefits of tokenization in the private capital markets are manifold. It democratizes access to investment opportunities, enhances liquidity, reduces barriers to entry, and simplifies the complex processes of buying, selling, and managing securities.

Moreover, it offers fractional ownership, allowing investors to buy shares in assets that would otherwise be out of reach due to high minimum investment thresholds.

Compliance: The Foremost Consideration on Blockchain in private capital markets 

When integrating blockchain technology into the private capital markets, compliance is the first and foremost consideration.

The choice between public blockchains and permissioned (private) blockchains is critical, as each offers different features suited to varying regulatory and business needs.

Public vs. Permissioned Blockchains

Public Blockchains:

  • Transparency: High level of transparency as all transactions are visible to everyone on the network.
  • Security: Highly secure due to widespread node distribution and consensus mechanisms.
  • Regulatory Challenge: May pose challenges in meeting specific compliance requirements due to its open nature.

 

Permissioned Blockchains:

  • Regulatory Compliance: Easier to tailor to specific regulatory requirements, allowing control over who participates in the network.
  • Privacy: Provides more privacy for transactions, which can be crucial for business dealings in private markets.
  • Scalability: More scalable than public blockchains because they can manage network participation and consensus process.

Selecting the Right Blockchain

Choosing the right blockchain for your business involves understanding the specific needs of your operations and compliance requirements. For instance, if your business model requires stringent KYC (Know Your Customer) and AML (Anti-Money Laundering) checks, a permissioned blockchain might be more appropriate. However, if you aim to maximize transparency and engage a broader investor base, a public blockchain could be more beneficial.

Framework Considerations

  • Regulations and Regulators: Ensure that the blockchain solution aligns with local regulations and is capable of adapting to changes in the regulatory landscape.
  • Technology Benefits: Evaluate how blockchain technology can improve efficiency, reduce costs, and enhance security for participants.
  • Ecosystem Integration: Consider how easily the blockchain can integrate with existing systems and other financial technologies.

Implementing Blockchain: Practical Steps

Map the Ecosystem: Understand all participants, from issuers to investors, and the roles they play.

Engage with Regulators: Early engagement with bodies like the SEC, FINRA, and FinCEN is crucial to ensure compliance and gain regulatory clarity.

Technology Adoption: Invest in the necessary technology infrastructure and expertise to implement and maintain blockchain solutions.

Educate Stakeholders: Conduct training sessions for all parties to understand the benefits and operations of the new system.

The Impact on Secondary Market Trading

Blockchain technology facilitates more efficient secondary market trading of private securities. It provides a platform for these transactions to occur with greater speed and less friction, enabling better price discovery and potentially more liquidity. Moreover, with blockchain, the historical data and transaction records of securities are easily accessible and indisputable, which increases market confidence and integrity.

The intersection of blockchain technology with private capital markets represents a significant leap forward in how investments are managed and traded. By carefully selecting the appropriate blockchain infrastructure—public or permissioned—businesses can leverage this technology to not only meet rigorous compliance standards but also to enhance operational efficiencies and open up new investment frontiers. As we look to the future, the integration of blockchain into private capital markets is not just an opportunity; it is a strategic imperative for continued growth and innovation.

This strategic blueprint aims to guide newcomers and seasoned professionals alike.

 

How technology is transforming online capital formation?

Friday January 12, 2024

Technology in capital formation and its synonyms are topics that are receiving a lot of attention in these days. Not only because the technical advances and features transformed (and still transforming) the ways companies get capital to fund their business. Let’s talk more about it.

TABLE OF CONTENTS

What is the role of technology in capital formation?

It is no trade secret that technology has played a pivotal role in transforming everything – from business operations to consumer behavior. And capital formation is no exception to this rule. Capital formation is the net capital accumulation for an entity over an accounting period.

When you think of how technology supports the discovery or improvement of products and services or the process of creating the same, it becomes evident that it has close linkages with capital formation too. The correlation is that technology offers capital formation a boost.

On the other hand, economic progress also creates favorable conditions for the growth and consolidation of technology. As such, they form a win-win relationship that promotes overall development.

Technology’s impact on capital formation

Taking this into consideration, let’s delve into how technology is revolutionizing the process of raising capital online.

In the next topics, we will explore a practical framework regarding the different details that involve this subject.

On that note, here is a look at how technology is transforming online capital formation.

Artificial Intelligence

Artificial Intelligence, or AI, is a major catalyst in transforming online capital formation.  For starters, AI-powered engines can crunch high volumes of data to perform a 360-degree analysis of potential investment opportunities and personalize the results based on the investor’s goals.  Such AI-based data analysts can work with structured and unstructured data or identify patterns that human analysts could miss out on!

Similarly, AI frameworks can predict the estimated cost of capital and the corresponding revenue with nearly 100% accuracy. These predictions remain reliable as every variable is accounted for.

Automation

Just like AI, automation is disrupting online capital formation in more ways than one. In manufacturing, automation is the secret ingredient that injects efficiency into processes and increases production value.

For investors, it is the medium for seamless onboarding and document management. Pair it with deductive technology like AI/ML, and you will have a self-sustaining, automated platform to track and manage capital in real-time.

There’s just so much potential here.  By adopting automation the entire sector can operate with the assurance it is compliant with securities regulators and transparent with the entire ecosystem supporting online capital formation.

Digital securities

Digital securities or security tokens are blockchain-based financial instruments. They are the digitized form of traditional securities like stocks or bonds and are issued and traded on blockchain networks.

Despite such similarities, digital securities possess greater advantages than their traditional counterparts. They are far more transparent, efficient, and secure. At the same time, they also offer greater liquidity as they can be traded 24/7/365 on the global markets with great ease.

Digital Securities is important to have vibrant private capital markets.  Digital Securities allow the opportunity to instantly settle and validate where this process would take weeks and months.  

Digital Securities do need to be 100% compliant with the securities regulators if not then there is no value in placing any of the securities on a blockchain technology with the expectation that the investor will be able to transact.

Online Capital Formation Platforms

Online capital formation platforms are offering entrepreneurs the opportunity to connect with the global investor base. As such, it comes as no surprise that crowdfunding platforms have become insanely popular of late, especially since the entrepreneurial drive is currently at its peak.

 

In addition to granting entrepreneurs access to a larger pool of potential investors, crowdfunding platforms are also emerging as the medium for entrepreneurs to connect with experts. Thus, it is gradually eliminating any barriers for an excellent idea to gain wings.

Digital identity verification

Online capital formation hinges on digital identity verification to ensure that only credible investors gain access to the capital market. At the same time, it also helps establish the accreditation of investment opportunities.

As such, it can make use of specific identity markers to securely and reliably verify details.  There are millions of potential investors and if they do not have a passport that is fully compliant and verified by a regulated stakeholder, the friction these investors face will be the major barrier for online investing.

In conclusion

Within the sphere of online capital formation, technology stands as the essential backbone, seamlessly integrating transparency, security, efficiency, and accessibility.

Looking ahead, technology is poised to revolutionize online capital markets, democratizing access and reshaping the financial landscape. The synergy between innovation and online capital formation promises an interesting future. Where technology continues to empower investors, foster growth, and redefine financial possibilities.

 

What are the private capital markets in business

Wednesday January 10, 2024

Beyond the familiar world of financial headlines, a vast network of private companies fuels global growth. In this context, many people are researching the subject to understand What are the private capital markets in business.

Firstly, the private capital markets, operates under different rules and holds potential for investors and businesses alike. In today’s post, we’ll explore practical aspects regarding the inner workings of this hidden ecosystem, its challenges, and its future.

What are private capital markets in business

If you’re looking about What are private capital markets in business, there’s a simple way to explain it. Basically,  the private capital markets are a field of the financial system where investors provide funding to privately held companies, i.e. those not listed on public stock exchanges.

These companies can vary from start-ups to more established companies seeking to expand or restructure.

With its particularities and own regulations, the private capital markets are and dynamic ecosystem that plays an important role in the world economy. In the next section, we’ll talk more about this, contextualizing with public markets.

Public vs private markets

The financial world is broadly divided into two segments. Both segments contribute approximately 50% of the world’s GDP. That’s where the similarities end. These two segments are the public and private financial markets, and they are vastly different.

The public markets generate 95% of the noise and the news. They are generally very efficient, fluid, and well-served by technology. These are the financial institutions and companies that we read about and see daily on TV.  As of May, 2022, there are approximately 58,500 publicly listed companies on the planet. In all, these companies have a market capitalization of about $90 trillion. 

Public companies have been increasingly going private for over a decade, fueled by the costs of keeping a public profile and the requirements of Dodd-Frank and Basel III. A larger proportion of public capital is in the form of debt, with many companies implementing aggressive share buyback programs. This has also decreased the secondary market liquidity, while the illusion of liquidity is maintained by the approximately 70% of trades generated by algorithmic trading. The retail investor is increasingly underserverd in the public markets.

Compare all this with the approximately 285 million private companies, of which private equity invests barely $9 trillion. However, the trend is rapidly changing. Since 2009, more capital raising has been done by private companies than by public companies, sometimes by a factor of 2.

Insights on private capital markets

What is especially interesting about the rise of private markets is that the trend is changing despite the private markets not having any unifying central authority or even a regulatory consortium. Private markets are significantly underserved by technology. For many participants in the private markets, technology means moving from a physical Rolodex to an electronic one (mostly, a spreadsheet).

Traditional banks have evolved into institutions that make it easy to collect retail savings and funnel them into institutional investment firms or lending back to retail or SME customers. There has been no infrastructure for retail private investments or private capital raising over the last couple of hundred years. For this reason, the private markets remain fractured and fragmented. The participants include broker-dealers, CPAs, law firms, funding platforms, auditors, transfer agents, and various auxiliary service providers (such as for KYC screening, custody, escrow, payment processing, etc.). All of these participants exist to connect private companies seeking to raise capital with private retail investors.

Attitudinally, private market participants want to remain private. They want to retain their individual branding and serve their communities and niche markets. However, they see the potential for tapping into the wider retail market, even internationally. The challenge remains how to do it efficiently.

On the public side of the market, it is easy to conduct trades after the accounts have been set up with brokerages. Anyone with a smartphone can place a trade for a publicly listed company and get a trade confirmation within seconds (assuming high liquidity and that the markets are open). A similar trade with private shares takes several weeks.

Final thoughts

From all this, we can see that the private markets are on the rise and, with supportive forward-thinking legislation such as the JOBS Act, opening up participation by the retail investors in a much more direct way. Private markets are not only here to stay but increasingly becoming more democratized.

 

What is missing is an efficient infrastructure of trust. That is a topic for another blog.

What are the Private Capital Markets?

Thursday December 15, 2022

What are the Private Capital Markets?

The private capital market is a vast market of investment opportunities and deals that often goes unnoticed compared to their much more visible public counterparts. While the private markets may not be as apparent to most, they offer an incredible array of opportunities for those willing and able to do the due diligence and research required to take advantage of them.

 

Growth in Private Capital Markets

The private capital markets, while seemingly more exclusive and less accessible than the public markets, are, in fact, a much larger market than their public counterparts. Private companies far outnumber publicly listed companies, with approximately 450 million private companies compared to only 100,000 publicly listed companies across the globe. This discrepancy results from fewer regulations and reporting requirements that come with private companies compared to public markets, meaning that many investors are willing to take on greater risk to gain greater returns.

In 2021, private US companies raised an estimated $3.9 trillion through private capital markets while only raising $1.2 trillion through publicly traded markets in the US. This clearly indicates the impressive potential within the private capital markets. Not to mention, the size of these markets is expected to double by 2027.

 

Who are the Participants in Private Capital Markets?

The private capital markets involve many participants and stakeholders with unique roles to play. With various regulations, laws, and rules that apply to the other participants, knowing who they are and their roles are essential when engaging in private capital markets. These include:

Broker-Dealers: Broker-dealers act as intermediaries between buyers and sellers of securities, typically on behalf of investors. They generally are licensed, regulated, and subject to oversight by governing bodies such as the Securities Exchange Commission (SEC) and FINRA.

Registered Funding Platforms: These platforms provide access to private capital markets for issuers and investors. Typically a platform registered with the SEC or other financial regulators, these platforms allow for securities transactions in the private capital markets.

Lawyers: Lawyers provide legal advice and expertise to the participants involved in the private capital markets, helping to ensure that all parties understand their rights and obligations regarding these markets.

Auditors: These are third-party accountants responsible for verifying companies’ financial statements in the private capital markets. As such, auditors provide an essential service when it comes to confidently engaging in these markets.

Transfer Agents: These companies act as intermediaries between buyers and sellers of securities while ensuring that the transfer of assets is done correctly and according to all applicable regulations.

Banks: Banks are licensed financial institutions that can hold companies’ funds while raising capital with broker-dealers or registered funding platforms.

Investors and Shareholders: These individuals or entities provide the funds for private investments in exchange for a share of the company, either through an equity stake or a debt instrument.

As the private capital markets continue to grow in importance and prominence, it is essential for those looking to participate in these markets to understand their roles, regulations, and best practices. By doing so, the market is compliant, secure, and prosperous. With increasingly accessible technology making significant advancements in allowing investors access to this market, the private capital markets are sure to only become more popular and accessible in the near future.

See the numbers?
We are going to own
this market.

Private Companies

$4.5 trillion

Public Companies

$2.1 trillion

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