Possibility of the digital asset market in the 2020s｜History and challenges of the US capital market

Although the number of listed companies has been decreasing in the US stock market since the latter half of the 1990s, the market capitalization has reached a record high.

The main reason for the decrease in the number of listed companies is deregulation of the private placement market, which has led to smoother financing from hedge funds and venture capital.

However, there are adverse effects such as overvaluation in which the corporate value becomes higher than the actual value before listing and the period until IPO is prolonged.

The significance of the existence of the stock market that has supported capitalism in each country is being reviewed.

In recent years, funding (STO) utilizing blockchain technology has been conducted to improve the liquidity of the private placement market.

The US stock market is forced to undergo structural changes such as strategically responding to companies in the rapidly developing advanced technology field.

The digital asset market is a hot market in the 2020s, so let’s look back at the history of the US capital market and consider the possibilities of digital securities.

Current state of the US stock market

In the US stock market, the private placement market is expanding rapidly, and in 2017 we recorded “public (public offering): $1.5 trillion private placement: $3 trillion.

There are a total of 15 stock exchanges in the United States, mainly the New York Stock Exchange and NASDAQ.

The number of listed companies peaked at 8025 in 1996, and reached 4102 in 2012, which is only half of the peak.

There are many possible causes for the decrease in the number of listed companies, but the number of IPOs is decreasing due to delisting through M&A and activation of funding in the private placement market.

On the other hand, the average market capitalization of the US public stock market has grown from $1.8 billion in 1996 to $7.3 billion in 2017.

The number of companies with a market capitalization of less than $100 million has decreased, and listed companies with a market capitalization of more than $50 billion account for 50% of the total market capitalization.

It can be said that the US public stock market is characterized by the fact that while the market capitalization of some companies is increasing, the total market value is doubling, but the gap is widening year by year.

Structural changes in the public stock market are considered to be a major factor behind the increase in the number of companies choosing to raise funds in the private market rather than IPOs in the public market.

The number of SMEs with market capitalization of less than $50 million has decreased, and 140 listed companies account for half of the total market capitalization.

Since 1996, the industrial structure has changed. In many cases, leading start-up companies choose M&A by companies with huge capital and carry out rapid business development by more advanced technology development and marketing.

In addition, technological innovation promotes digitalization in each industry, and even listed companies cannot respond to changes in the market environment, and there are many cases in which they choose to delist their shares or choose M&A paths at an early stage.

Therefore, companies need to procure highly specialized management resources more quickly.

It is necessary to deepen ties with PEs and VCs who are familiar with market trends, and the financing methods other than IPOs in the open market have been activated.

• Excluding Palantir Technologies, which collaborates with large companies and organizations

In recent years, due to the effects of monetary easing, assets under management in the US reached $5 trillion in 2017 (2000: $1 trillion).

The combination of structural changes in the capital markets and monetary easing policies is one of the main reasons that M&A is actively carried out due to the long period before the IPO.

Next, let’s look at the US private placement market from the perspective of laws and regulations.

History of deregulation in the US stock market

1933: Securities Act

Regulations on securities issue market (primary market). Established information disclosure such as obligation to disclose information through prospectus, financial report every quarter after listing and shareholder movement report.

1934: Stock Exchange Act

Regulations on the secondary securities market.

1982: Established Regulation D

Creation of certified investors (net assets of 1 million dollars or more, annual income of 200 thousand dollars or more for the past two years, total income of couples 300,000 dollars or more)

1996: National Securities Markets Improvement Act of 1996（NSMIA）

A law that excludes securities listed on the stock exchange from the Blue Sky Act.

This law also excludes private placement securities that comply with Regulation D and is said to be the beginning of deregulation in the private placement market.

Since the number of IPOs has decreased since 1997, it can be considered that the Securities Reform Act has contributed greatly to the development of the private placement market to date.

2012: Jumpstart our Business Startups Act

Established Regulation A+ and relaxed regulations to facilitate financing of EGC (emerging growth company).

Financing under Regulation A+ is also called a mini IPO. Funding for 12 months is limited to 20 million, but it has led to the activation of stock-type crowdfunding.

It can be considered that the decrease in the number of IPOs up to today is largely due to the establishment of NSMIA.

In addition, the JOBS Act has enabled the act of soliciting to the general public by the establishment of Regulation A+, creating a new framework that abolished the lockup period under Rule 144A.

This allowed companies to raise funds in the private market in a manner similar to public offering, and the market has grown to the $3 trillion scale.

Currently, the standards of certified investors and efforts to regulate crypto assets are being conducted mainly by the US Congress and the SEC, but most of the STO are regulations D506 c that allow solicitation to the general public.

There is a tendency to be done according to. It has been handled in the secondary market after the lock-up period according to Rule 144A, and it is expected to be utilized for further development of the private placement market.

About Private Equity Secondary Market

In the United States, security tokens have already become popular in the private placement market as a legally compliant financing method.

Galaxy Digital Holdings Ltd., which is operated by the Canadian exchange group TMX Group, was approved by FINRA (Financial Trading Industry Regulatory Authority) in September 2019 as an underwriter for underwriting publicly offered securities.

Galaxy Digital is a company that invests and invests in crypto assets, and will also work on public offering (digitized IPOs) using security tokens.

TMX Group operates the TSX Venture Stock Exchange, a stock exchange for startup companies in Canada.

In the United States, efforts are underway to open a stock exchange to raise funds for startup companies under the bill called “Main street Growth Act.”

The United States, where security tokens are becoming more popular.

・Open market where hundreds of companies including Big Tech increase market capitalization

・Private market where growing companies aiming for technological innovation raise funds from VC and PE

The US capital market is also expected to be polarized.

About the US Private Equity Market

Since its founding in 2004, SecondMarket has been proactive in its efforts to disclose information, such as requiring issuing companies to disclose audited financial data.

Leading emerging companies such as Facebook and Pinterest before the IPO were also trading in the second market.

In 2015 it was acquired by NASDAQ Private Market.

Founded in 2009, SharesPost is a private equity trading platform with over 300 companies and trading volumes of over $4.5 billion.

Stocks of high-growth companies such as Ant Financial Finance, ByteDance and Spotify are traded, approved by FINRA as a broker dealer and registered by the SEC as ATS (Alternative Trading System).

Therefore, security token issuance, transaction, and custody work are possible.

SharesPost also supports over-the-counter (OTC) trading of security tokens and has announced plans to implement real-time trading in the future.

Venture capital Blockchain Capital, which invests in blockchain companies, is conducting a trial transaction of the issued security token “BCAP” on Shares Post.

As such, SharesPost, which has many years of experience in the private equity market, is engaged in security token transactions, and information disclosure efforts and the investment environment have already been established in the United States.

At present, the tendency of growing companies to raise funds with security tokens to acquire new investors is not so large.

However, as I have reported, the US stock market is facing pressure from structural changes due to deregulation and the formation of a secondary market.

The digital asset exchange will also be tested for its usefulness as a new strategy for digitizing the stock market.

Summary

In recent years, a number of listed companies have sprung up, such as the Wework issue and the stock price slumping after listing.

It can be said that the expansion of the private placement market has changed the structure of the stock market.

In the past, the stock market had the role of building a brand image and raising awareness by listing, but nowadays, listing is the goal of company management, and many people have the impression that it is just a money game.

The gap between large companies and other companies tends to increase, and the utility of private equity trading platforms and exchanges for start-up companies is expected to increase even more in the future.

In such a market environment, digital asset exchanges will play an important role in arranging new financing methods in the private placement market and integrating existing finance and the token economy.

Many investors expect higher yields from digitalization.

As more assets are digitized, capital markets will realize the potential.

To that end, it is necessary to develop laws and create use cases in each country.

Digital assets will be commonplace in 2030. We are in a great time to witness the creation of the market.