iSTOX's novel approach to private markets needs time to gain acceptance

Singapore

INDUSTRY players are optimistic as to what capital markets platform iSTOX can bring to the private markets, but some cite concerns over whether the platform can actually attract essential stakeholders.

The platform announced on Monday that it has graduated from the Monetary Authority of Singapore's (MAS's) FinTech Regulatory Sandbox, and is now fully licensed operational.

What makes iSTOX novel is that it uses blockchain and smart contract technology to facilitate transactions on its platform for the trading of secondaries or for issuances. However, it is not a cryptocurrency exchange as all issuances will be bought and sold using fiat currency.

"As private markets continue to grow, it is a natural trend for new technologies to emerge to enhance trading efficiencies," said Li Chuan Hsu, a senior partner at law firm Dentons Rodyk, one of iSTOX's ecosystem partners.

The transparency iSTOX hopes to bring to the private market has some benefits, which include a potential increase in the volume for the trading of secondaries - an active space in the private market right now.

Opportunities in the private markets are not traditionally available outside a small, closed group of participants who deal behind closed doors.

There is no standard price discovery mechanism for these deals, so buyers and sellers rely on publicly-disclosed valuations as a gauge, according to previous reports from The Business Times.

"The business case for secondaries is quite strong. However I don't believe the market is ready for blockchain solutions yet. The technology holds a lot of promise but it could take a few years before it becomes the accepted market standard," said Lachmi-Niwas Sadani, founder and chief executive of private equity firm Lensbridge Capital, a PE firm that is active in the secondary market.

Traditionally, the sale of secondary shares is typically restricted under the shareholders agreement, and is subject to other shareholder rights such as pre-emption or co-sale rights, said Joel Shen, a technology lawyer and partner at global law firm DWF.

"Most of the time, it would be undertaken on an ad hoc basis," he added.

In order for secondary shares to be freely transferred on a regulated exchange, Mr Shen says, there will have to be fundamental changes to common shareholder arrangements that take into account such shareholder rights.

However, iSTOX says that their platform is able to use its smart contract technology and take instructions from the issuer on how it wants the digitised security to execute the distributions in a liquidity event and program the digitised security accordingly.

"Compared to the traditional platforms, iSTOX offers benefits like more flexibility in terms of structure, so our user-driven model allows issuers to specify various parameters and/or restrictions, and we will put that into the digitised security accordingly," said an iSTOX spokesperson.

Mr Hsu from Dentons Rodyk noted that such new, developing, innovative technologies often take time to gain awareness amongst accredited and institutional investors.

"It is unfamiliar territory, and as with anything new, it takes some time to gain traction," he said.

Yee Chia Hsing, head Catalist at CIMB Bank Singapore, agrees that awareness towards this new platform might not be there yet. But he pointed out that the iSTOX platform provides a possible alternative for unlisted companies to raise capital, with more flexibility when compared to listing on traditional platforms.

"Companies seeking to list on traditional platforms face market uncertainties as they can sound out investor interests only after significant listing expenses," he said.

Mr Yee added: "When companies list on the iSTOX platform, they would have to go through an assessment from an ecosystem partner like CIMB Bank, as well as another independent investor to reduce market uncertainties. The iSTOX platform also allows companies to scale down the issue size to match lower market demand, if needed."