Blockchain’s ability to provide a tamper-proof record and a permanent data chain to users address some of the biggest concerns in the private equity (PE) market, according to Hong Kong Exchanges and Clearing (HKEX).
In a recent research on fintech applications, Hong Kong’s stock market operator noted that decentralisation, encryption and confirmation by consensus – the key features of blockchain - can solve issues in the PE market.
Venture capital and PE investments in China as a whole reached $56 billion in August, according to Thomson Reuters data. And there are currently no credit intermediaries to register these private equity transactions.
As a result, equity changes and shareholder information are not fully recorded, and each transaction involves lengthy documentation review.
Moreover, there’s a lack of transparency in equity ownership information as well as the valuation adjustment mechanism, which could give rise to potential fraud and make it difficult for investors to fully understand the risks involved.
All these problems affect the initial public offering (IPO) process as they delay auditing and due diligence on historical equity ownership, the HKEX report stated.
Hong Kong has been one of the busiest IPO venues in the world this year. In the first nine months of 2018 alone, the stock exchange raised HKD 242.7 billion ($30.9 billion) from IPOs, an increase of 177% from last year.
How it works
Distributed ledger technology can help facilitate the issuance of e-certificates on equity ownership by start-up companies and increase the transparency of equity transaction information.
Furthermore, blockchain-based smart contracts can compile the valuation adjustment provisions of an agreement, making it easier to implement them.
For example, if the start-up qualifies for additional funding, the smart contract can automatically transfer extra investment funding from the investor’s account to the financee’s account. In case the start-up fails to meet additional financing criteria, the smart contract can automatically transfer some of the founder’s shares to the investor.
‘Blockchain technology can improve the efficiency of private equity transaction, with immediate post-trade clearing and settlement. It can also increase private equity market transparency and boosts the vibrancy and liquidity of the primary market,’ the report concluded.
The US is already dabbling in the space. In 2015, Nasdaq jointly launched a blockchain-based private equity platform together with blockchain start-up Chain called Nasdaq Linq.
The platform allows start-ups to inquire about the issuance of share certificates to investors, the validity of the certificates and other information such as asset serial number and price per share.