Blockchain is Setting the Stage for the Pre-IPO Market

Despite the initial public offering (IPO) route providing an easy access to capital, many companies are now staying private for longer periods of time. Nasdaq cites a report by Greenhill Cognet which claims that the transition period for companies to go from their venture-backed stage to an IPO has increased from 3-5 years in 2000 to 10-12 years in 2016.

This significant change is attributed to several benefits available to companies during the pre-IPO phase. Firstly, they don’t need to deal with the higher levels of regulatory scrutiny and financial reporting compared to a listed company. Secondly, private companies can save on IPO process as well as the recurring quarterly and annual costs linked to procedural overheads of a listed company. Thirdly, private companies aren’t vulnerable to market forces, shareholder pressure, takeovers and mergers post IPO face. It may not be worthwhile for a company to go public if it already has enough capital, revenues and recognizable brands.

All is not Well during the Pre-IPO Period

Along with the benefits of staying in the pre-IPO stage, there are also many drawbacks, both for the company and its private investors.

For instance, there is a liquidity problem during the pre-IPO phase. Company founders, early investors, and stock holding employees may not be able to sell their shares at all or may have to sell them for less than their value when trying to cash out private share holdings. Other interested parties, including retail investors, may not be able to invest in a company stock during its pre-IPO phase thereby limiting the return potential. Educated investors will often buy shares in companies during their early stages when the investment required is lower.

Delaying the public listing is often associated with a company’s business reaching a threshold which will limit return potential going forward and so, companies may also find themselves lacking funds they would otherwise have had access to through an IPO.

Can Blockchain-based Pre-IPO Listings Help?

Essentially, the uncertain time gap from the pre-IPO stage, through the IPO process, to the secondary market (post-IPO) trading appears to keep the company’s potential locked and unutilized for a lengthy period. A balanced approach that offers the best of both phases can be win-win situation for all. Along with trust, liquidity and low-cost advantages, companies should not be burdened with heavy compliance requirements typically needed for listed companies.

Blockchain offers an ideal platform to fulfill such requirements owing to its efficient, low-cost and decentralized operating mechanism. A few innovative solutions are being launched to offer workable solutions.

TheElephant is a blockchain-based project which allows investors to purchase tokenized shares representing equity ownership in real-world pre-IPO companies. Using blockchain technology to issue equity-backed crypto tokens, the platform has established an early-stage, pseudo-secondary trading market allowing individuals to gain access to investments in high-profile pre-IPO businesses. Elephant differs from a standard initial coin offering (ICO), as it is backed by equity holdings of real world companies.

While small time investors can now trade using tokenized shares of otherwise inaccessible early-stage companies, existing shareholders (like founders and employees) get the desired liquidity and more accurate price discovery for their holdings. Pre-IPO stage companies can benefit by listing their shares on the Elephant platform at low cost without going through the often complicated and drawn out real-world IPO process which involves high costs, mountains of paperwork, and many regulatory requirements.

Currently, the Elephant platform allows investment in shares of more than 20 high-profile pre-IPO companies including Circle, Outbrain, Bla Bla Car, Palantir Technologies, IronSource, and Gett which collectively represent $70 million worth of share valuation and were listed on the Elephant platform by their existing shareholders.  Currently the platform has more than 2,000 registered investors and has recently partnered with Compass Blockchain Solutions Ltd. for its Security Token Offering (STO). Compass, a leading international provider of next-gen end-to-end blockchain solutions and services, will be partnering in an advisory capacity to Elephant for its STO.

Launched by Overstock.com’s (OSTK) founder and CEO Patrick Byrne, TZero is another blockchain-based platform that works as the first-ever SEC-regulated, crypto-based alternative trading system (ATS). It plans to emerge as an alternative to stock exchanges like NYSE and NASDAQ using blockchain and offering advantages such as reduction in settlement time and costs, increased transparency, liquidity and efficiency, as well as better audit tracking. They are attempting to democratize the capital markets by creating a transparent and decentralized trading operation and tokenizing equity shares, putting all documents and processes on a blockchain. They will cover all necessary functions of a trade’s lifecycle - starting from pre-trade, order management, trade execution, clearing, post-trade settlement, all the way up to reconciliation and record keeping.

Being SEC-compliant allows TZero to offer many related services that other platforms may not be able to provide for want of regulatory adherence. For instance, they can provide advisory, clearing, and verification services to other businesses interested in issuing tokens to raise capital, and can also support trading services like security lending.

While the space continues to evolve, active participation by many high-profile companies as well as investors indicates good traction in the emerging marketplace. Blockchain and crypto-based markets will add a new dimension to the exciting world of investments and trading, creating a faster, cheaper and more transparent process.