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Blockchain, Angel Investing, and the Hong Kong Stock Exchange

February 3, 2017

It appears that the HK Stock Exchange is trying to get into doing something with blockchain

Since they are thinking about doing something with blockchain, here is an idea that would make my life as an angel investor much easier, and be something that puts Hong Kong on the map when to comes to fundraising.  Right now, Hong Kong is trying to be a startup hub, and Hong Kong is turning into a place where any startup in the world can come to in order to get funding, while anyone that invests in startups can invest.

Right now, there is a tremendous amount of inefficiency in startup investing because none of the back office is automated.  The situation is this.  You’ve done your pitch in front of a group of angels, they now want to invest.  It can take weeks to just fill out the paper.  Worse, suppose one angel wants to transfer their shares or debt to another angel, that can take days.  At the end you have to fill out the forms, and keep track of what you’ve promised to whom, and it’s a total nightmare.

What the HK stock exchange can do is to create a shares/debt ownership registry that any company in Hong Kong can enter information into.  Right now, HK private companies are by law required to have a registry of who owns what shares, and what debt has been issued.  Those registries are usually on paper in some filing cabinet in an accountant’s office.  By creating a registry of share ownership, the HKEX can revolutionize startup investment, by making it possible to transfer shares and debt easily.  Also once you have the registry in the HKEX, then local Hong Kong brokers can access that registry, and if you are a professional investor, you can manage your angel investments as easily as you manage your holdings of bonds and stocks.  So what will can happen in one year, is that a startup gives the pitch, and at the end of the pitch they tell potential investors that if they want to invest, they can go to their local HK broker, show proof that they are a professional investor, and just buy the shares or convertible notes.  The other thing is that once you have the registry in one place, then stock analysts can access that registry.

The beauty about this system is that it requires absolutely no regulatory changes.  Angel investors and companies will be subject to exactly the same rules as before.  Companies will do exactly the same things as before, only instead of paper, they can record ownership on a system run by HKEX.  You don’t want regulatory changes.  Anything that involves even minor regulatory changes means that you will be stuck in meetings for years.

So why the HKEX?  First of all, the HKEX can do tech.  The thing about stock exchanges is that they have a huge amount of technology, and things just work.  You buy or sell shares and things just happen.  Second of all, you have to have an opt-in process.  You’d think that the Company Registry would be the people that should do this, but the problem with the CR is that a lot of HK companies happen to be run by rich people that don’t want noisy reporters to figure out where their money is, and so the Company Registry is set up specifically to make it painful to do big data searches (just try to do one).  You can try to get CR to change policy, but that means getting stuck in meetings for years, and probably getting nothing done in the end.

By contrast, you as a HK company can choose whether you want to put your financial information onto the blockchain with the exchange or else whether you just want to do things the old fashion way with paper.  It turns out that small startup companies really want people to notice them, and so would be much less concerned about putting data out.  The other thing is that small startup companies really *want* investors to do big data searches to find them.  Rather than try to use one registry which has people with conflicting interests, it makes sense to have two.

The thing about this is that eventually someone will do this.  All it is is a key-value pair. The question is where and who, and since the HKEX is looking for ideas, and they have the people that can do tech, here is one.

From → blockchain, hkstartup

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