Blockchain is a progressive improvement in the practical application of private equity financing

Blockchain is a progressive improvement in the practical application of private equity financing

The development of the blockchain has sparked global speculative bubbles, new model commitments, subversion of existing business models, and even whispers that a new Internet is being created. But what is the practical application that laymen can understand? Where are the products or services that can be used as proof of concept? Is this just the formalism in the necessary technical hype? If at least 1% of the 1% of actual currency transactions anywhere in the world use Bitcoin or any other cryptocurrency as the actual trading medium, rather than the trading medium that best be known as the Glory Gambling Mechanism, there is only Bitcoin. .

So let's consider the blockchain as a transparent, accessible distributed ledger system and study a modest use case that can be implemented today to reduce business costs and hope to provide some long-term value. In particular, let us focus on the process of capital formation in the private market. why? Because the past fraudulent ICO boom taught us something, that is, there is a huge demand for the way to invest in private securities: to participate in the next Facebook ability, diversify into income-generating real estate projects, and help fund social impact programs. , or public-private infrastructure projects, or provide early access and increased liquidity for venture capital (VC) funds.

Historically, venture capital firms have been the gatekeepers of some of the most profitable private investment opportunities. However, this trend has matured and can now be transformed. For example, if we focus on the advantages represented by digital securities, it is clear that securities issued and maintained through blockchain networks can be revolutionary even in this established and successful niche industry. The ICO boom of 2015-2018 triggered a discussion of solutions and caused tremendous damage to the VC funding model. Because the US Securities and Exchange Commission (SEC) intervened and announced that ICO should comply with corporate security laws, there is a blockchain-based programmable security that is designed to comply with all regulatory regulations globally. Such new digital securities and their advantages, while following a well-defined legal framework, may actually increase the demand for venture capital fund investments because they inevitably make the investment process more transparent and easier. Get and be more efficient.

Investors in venture capital funds must strictly adhere to their capital lock-in period, usually 7 to 10 years. Private opportunities to trade from these locked investments are limited, but they are costly, usually 20% or more of the net worth. It is very challenging to find a buyer who withdraws from the limited liability partnership in advance. The frictional costs of traditional VC fund investments are mainly caused by legal and administrative fees collected by third parties, which require verification of information and thus act as trusted intermediaries.

The Private Security Act requires a “know your customer” (KYC) and anti-money laundering (AML) inspection system whenever investors transfer their ownership of a safe asset to another investor. Subsequent documents are sent to each investor, reviewed by their respective attorneys and accountants, signed, and shipped to a third-party administrator. In the actual asset transfer, there is a need for an escrow agent that holds custody, accepts payments and waits for settlement, and then facilitates the transaction. The transparent and distributed ledger system solves these legacy inefficiencies when they record ownership changes, verify investor status, timestamp transaction history, and automate compliance through an easy-to-access and shared database.

Allowing investors to obtain investment from venture capital funds earlier also provides an advantage for general partners. The fund no longer needs a redemption date and no longer has to have a fixed date to return all capital to investors. This eliminates the pressure of exit holdings due to capital constraints, rather than an analysis of potential liquidity events and fund investment spending.

Digital securities are programmable. This offers the possibility of interesting new features, one of which is that the fund can choose to automatically repurchase its limited partner's main investment in a pre-set time increment instead of issuing dividends. This is a mechanism to return the principal investment to a limited partner while allowing for the residual profit to be held at will. These types of functions have a tax advantage for limited partners because they do not have to declare earnings before exiting the holding. The repurchase also increases the liquidity of the secondary market and provides quotes at market prices. As a result, the future financing costs of securities issuers can be reduced because the valuation will be higher.

Another advantage of issuers of digital security venture capital funds is that the cost of managing securities is almost the same whether they are held by 10 investors or 10,000 investors. This is because the number of intermediaries required to verify information is reduced, and frictionless transfers of data and assets allow more global investors to participate in potentially smaller investments. This democratization, or the ability to allocate investment opportunities to a wider audience, and in a step-by-step manner, may lead to larger and faster overall financing.

It is important not to assume that these securities will immediately provide liquidity through the secondary market, even if there are many exchanges, such as Tzero and OpenFinance, which were established to facilitate pricing discovery and match buyers and sellers in the new securities category. Liquidity comes only when there is demand for securities, and this demand is a function of expected returns, not just an automatic by-product of usability.

However, due to the elimination of the above 20% sales discount (due to friction costs) in the early exit of traditionally structured venture capital funds, these blockchain-based securities issue investors will not face the barrier of secondary market transactions. This makes liquidity at least a higher probability.

After the digital security is released and managed in the market, the issuing company can hold a proxy vote with just a few clicks. If the proxy vote involves additional capital issuance, the general partner can give his current investor the option to participate at a discounted price. If it is easier to expand the capital size of the fund, it will save the general partner a lot of cost, instead of closing a fund and transferring it to the new fund after 7 to 10 years.

The accumulation of these incremental improvements increases the overall efficiency and capital availability of early private companies. This means that more ideas, and ultimately more success, will have the opportunity to rethink and improve the world we live in, redesign how we interact with each other, and realign the way companies operate. As a practical application in private financing, blockchain is a gradual improvement, but it is exponentially accumulated, and finally redesigns the way in which securities transactions are initiated and settled. (madman coin)