Hunit - Smart Legal Contracts

Private Market Structural Challenges

Transactional Friction and Liquidity

Prof. Aswath Damodaran, widely cited valuation expert from NYU’s Stern School of Business, makes the assertion that regardless of business type, private companies suffer from a 20-30% valuation discount due to the illiquidity of the private equities market. While this discount level generally applies to formal valuations (such as those determined when raising capital), owners of illiquid private securities often pay a larger sellers-penalty when trying to sell interests in all but the largest and most well known private organizations.

Investor Rights Enforcement

In Hunit’s view, investor rights enforcement is due for a big update – regardless of the investment instrument (private or public). Investor rights in even the highest quality securities are called upon in a proactive, costly process where legal representation is retained, a lawsuit pursued and a decision is adjudicated.

In the best cases, this process takes time, capital and resources for what can be an uncertain outcome. If the investment instrument itself or assets backing it have contact with poorly functioning judicial systems (such as those found in many countries in the developing world), the risk associated with poor investor rights enforcement is multiplied.

From the beginning of our development, Hunit’s aim has been to provide the global financial industry with a phase change in how investor rights are committed, recorded and enforced. Read more about our platform and technology.

Increasing Litigation Risk

Investors aren’t the only stakeholders that are being poorly served by today’s model for managing investor rights. In the large majority of cases, accessing a global financial market via a securities issue (equity or debt) requires the issuer to submit to the legal jurisdiction where their exchange is found. A consequence is that the issuer then loses the ability to regulate its relationship with its investors (as would be possible under a binding shareholder agreement for example), instead relying upon the full breadth of the corporate legal codes applicable to its listing.

As research about the US securities market demonstrates, the major financial markets often offer investors a broad spectrum of available legal action, many of which can be (and sometimes are) used in an abusive or disingenuous manner. As a result, the trend is towards companies seeking to stay private longer or reprivatize if possible. This forces issuers to accept the drawbacks of the current, paper-based private market as, inconvenient as they may be, they represent the more desirable option in comparison to a public securities issue.