Workingwith French crowdfunding platform SmartAngels, is bringing blockchaintechnology to the funding of SMEs, offering a glimpse of the possible future ofEurope's capital markets.
Thepartnership willallow companies to issue securities on the primary market and allow investorsto access the secondary market using blockchain.
Otherwiseknown as a distributed ledger, blockchain works by recording transactions ineach computer in a network, potentially improving transparency and loweringcosts. Although some observers are cautious about the potential for this much-hypedtechnology, those involved in the BNP Paribas/SmartAngels tie-up say it is aconcrete project that should deliver real rewards to participants, and may helpcreate a wider secondary investment market in startups and other fast-growingbusinesses.
"Amongnon-quoted companies, there is a real need for standardization," JohannPalychata, a product manager at BNP Paribas Securities Services, said in aninterview. "On the part of investors too, there is a need for transparencyand standardization of the [shareholder] register."
Afterit receives the necessary legal and regulatory approval, the joint project isset to launch in the second half of 2016. At first it will target the automaticlisting of the companies funded by SmartAngels. Investors will benefit frominstant recording of their payments and issuance of electronic stockcertificates, while issuing companies will be able to manage their investorbase more easily.
AsPalychata observed, the application of blockchain technology offers a widerange of possibilities at potentially low cost because the technology islargely open source.
Inan April 5 press statement, BNP Paribas Securities Services' Philippe Ruaultsaid the move would help with the accounting for nonquoted shares. Ruault, whois head of product for clearing, custody and settlement, said it is also a wayfor the company "to test what could happen tomorrow in quoted markets."
The basic challenge is to bring small, unquoted businesses, particularlyfast-growing startups, together with investors more efficiently.
BenoitBazzocchi is the CEO and founder of SmartAngels, which launched in 2012 and hasraised about €20 million for approximately 40 companies. In an interview, hesaid he saw "strong growth" in this investment market in France. Thecorrect structures for investment have historically been lacking, he said, butnow demand is taking off. Much has been done to make investment easier, such asa recent initiative by the French finance ministry to increase the amount thatcan be raised by a company through platforms like SmartAngels to €2.5 millionfrom €1 million. But investment in this area is still dogged by complexity, hesaid.
Bazzocchisaid the joint project would resolve security issues around sharecertification, and would mean SmartAngels had digitized the whole process of investmentin non-quoted companies from subscription through to registration. Onlineinvestment in such companies will be possible, reducing complexity and cost.For the companies themselves, full digitization should make raising funds andcommunicating with investors significantly easier.
Thepossibilities are wide-ranging. In particular, the use of blockchain and thecreation of e-certificates in the nonquoted SME sector opens up the possibilityof trading such certificates securely. A secondary market in not justcrowdfunded SME investments could emerge.
Existingmarket service providers have not failed to notice the possibility.
InDecember, Nasdaq Inc.said a user of its Nasdaq Linq ledger technology had successfully completed aprivate securities transaction, which it said was the first of its kind usingblockchain. This process reduces settlement time and eliminates the need forpaper stock certificates, the exchange company said.
SmartAngels'Bazzocchi said that, whatever the differences in detail, the Nasdaq moveessentially embodied the same goals of the joint venture between BNP Paribasand SmartAngels. Competitionin the segment is thus likely to be fierce, given the considerable potential.
Palychatasaid that the BNP Paribas/SmartAngels project would initially be limited toFrance but could eventually be expanded to Europe as a whole. As the technologyexpands from listing and trading services for non-quoted startups to SMEfunding, access to markets as foreseen in the EU project couldbecome a reality.
Thedream is that European markets could expand from several thousand quotedbusinesses to embrace hundreds of thousands of startups and fast growing SMEs,enabling them to finance themselves rapidly and at low cost through individualand professional investors. This would result in considerable disintermediationof the banks, Bazzocchi said.
Itremains to be seen whether businesses and investors will embrace thisopportunity and realize the dream.