Public AND Private – it’s about consistent regulatory/investor protections and world leading infrastructure

By David Ferrall

FinClear/FCX Founder, Managing Director & Group CEO

ASIC recently ran a consultation process to promote discussion on the dynamics between public and private markets.

While much of the debate focused on whether there are structural changes underpinning the ongoing growth of private markets versus the relative stagnation of public markets the consensus was both public and private capital markets are crucial to Australia’s economy.

Each play a distinct role however private markets operate differently and are inherently less transparent.

When considering options to raise capital, companies and funds will make their own decisions based on particular circumstances, growth trajectory and disclosure regime that best suits their own purposes.

However, with private companies choosing to ‘stay private longer’ another dynamic presents which is enabling and providing regular ‘liquidity windows’ for early investors and staff that may have stock and option awards (ESOP’s).

What becomes increasingly important is that Australia has broad capital markets infrastructure, including clear regulatory rails, that give choice to companies/funds and consistent disclosure and protections to investors.

Without this Australia will fall behind other global markets.

As the ASIC review highlighted, public market adjustments could improve and enhance their attractiveness while private markets continue to grow needing measured regulatory guidance and alignment to international standards.

In Australia we have prided ourselves on our public market infrastructure and capabilities as a means to enable companies and funds to access growth capital.

But our private markets have had no such infrastructure or regulatory guardrails. In fact, spreadsheets and opaque disclosure are the norm with many transactions falling into the ‘grey zone’ of the Corporations Act and as a result potentially placing many private company directors at risk.

The Corporations Act is very clear for companies when it comes to managing the sale and purchase of their own shares between investors. When you are managing numerous buyers and sellers, you are likely to be considered running a market, which requires a markets licence issued by ASIC.  Helpfully, there is an exemption for small volume markets, which allows such markets for up to $1.5m per annum.

Engaging a broker to ‘build a book’ via a placement process is a well-worn path but depending on how a price is agreed and the parties involved this may also be considered running a market.  Whilst the broker may have an AFSL, they generally won’t have a markets licence.

Bulletin boards where shareholders ‘meet’ to exchange shares in private companies serve a purpose, but they are not endorsed or mandated by the company and do not operate as a regulated market/exchange meaning disclosure may be asymmetric or even non-existent.

At FinClear, we specialise in public market trading, clearing and infrastructure.  We have been aware of this dynamic for some time and set about building infrastructure that exceeds current public markets capabilities while providing regulatory assurance for companies and directors to operate in a safe, secure and compliant fashion.

Our platform, FCX, is regulated by ASIC as a market and by ASIC and the RBA as a settlement facility.  In other words, we are licensed to operate a platform for the trading and settlement of transactions in securities in private companies and units in MIS (unlisted funds). The FCX platform supports a variety of liquidity structures, ranging from limit order book in which buyers and sellers can submit orders at different prices, through to fixed price tender windows in which the issuer sets the price at which buyers and sellers can sell, and it also supports expressions of interest prior to a fixed price tender window,

It is in fact the only facility in Australia (other than ASX CHESS) which has a licence to clear and settle transactions in shares and is the world’s first end to end regulated solution for trading and settling of private market transactions.

At its core we use distributed ledger technology to tokenise securities and cash and then employ smart contracts to provide legal and operational efficiencies (real time trading/settlement) but the legal protections remain, a share is still a share and cash/proceeds are held in highly regulated trust accounts.

Of note on public exchanges where trading is continuous, it follows that issuers’ disclosure obligations are also continuous.  For FCX, the position is different.  That is because FCX is not a continuous trading venue and instead operates only when liquidity windows are scheduled by the issuer.  As a result, FCX does not require “continuous disclosure” in the way required by public exchanges.  Rather, it requires that MNPI/disclosable information is made available in the lead up to, and during, a liquidity window.  There are no disclosure requirements in the periods between liquidity windows.  In the context of private markets, this strikes the appropriate balance, ensuring investors are fully informed at the time they make their trading decisions.

We already hold over $2bn of tokenised assets on platform while total global tokenised Real World Assets (RWA) sits at circa $60bn and is set to grow to $19tn in 2033 according to the Boston Consulting Group.

While we are excited by the private company opportunity the capability for FCX to deliver an alternative to redemptions and regular liquidity events for unlisted/illiquid funds presents what we believe will be a generational opportunity for the funds management industry in Australia.

We are currently in the process of running a secondary liquidity event for Future Group which will be the first event employing our recently awarded licenses and full technology capability.

For unlisted Australian companies and funds FCX provides infrastructure and capability that delivers profound efficiencies and investor protections while working within secure regulatory rails. The platform also revolutionizes how ESOPs are managed providing automation of processes and complete audit history while automatically updating the unit registry at the back end.

But more importantly it delivers an expanded and more diverse capital markets ecosystem that now gives companies and funds more choice.

The debate should not just be about public versus private but more about how do we provide a more holistic capital markets ecosystem that can support efficient, safe, regulated capital raising and recycling capabilities from early-stage growth companies the whole way through to large publicly listed companies and funds.

This then will ensure Australia remains as a viable and attractive option for companies, funds and our entrepreneurs to raise capital and support Australia’s economy.