PE blockchain fund delayed by Chinese regulation

A Chinese regulatory crackdown on digital currencies has delayed the launch of the first private equity fund administered by blockchain technology.

Intellisys Capital was due to launch Mainstreet Investment earlier this month, but pushed back its market entry to February 27 after the People’s Bank of China warned several domestic exchange operators they must comply with regulations or risk being shut down.

“We delayed the initial coin offering so Chinese investors can invest. China is the biggest market for us so we wanted them to benefit from the opening discounts we are offering,” Charlie Shrem, co-founder and chief technology officer at Intellisys told pfm.

The fund will raise capital by distributing a blockchain platform-based token called Mainstreet Investment Token; these tokens can be bought using any one of 29 virtual currencies including bitcoin.

“The tokens are available freely, and globally, but there is a restriction on US investments because of the regulations surrounding private equity fund structures in the country,” Jason Granger, chief executive at Intellisys Capital said.

If a single US accredited investor bought into the fund, the total number of investors would be restricted to 99.

“We want it to be a global platform open to investors all over the world,” he said.
There is no minimum commitment, while any one investor can own a stake up to a maximum of 20 percent of the total fund value. The investment is also liquid; an investor can sell their stake after 60 days.

“Tokens will be sold at $1 each at the outset, with a 10 percent discount available to investors buying in during the first week,” Granger said. “Anyone committing $500,000 will also get a bonus.”

Once the firm closes its first deal, which is already in the pipeline, the value of the tokens will be subject to market movement.

“After that, the token essentially has a net asset value. It can be traded on an exchange, and its value will be determined by demand,” he said.

Around 35 percent of the fund’s capital will be invested in mid-market, real estate and funds of funds; 25 percent will target future mid-market firms; and another 30 percent invested in blockchain development firms. The remaining 10 percent will go towards operations.

Blockchain explained

A blockchain is a digital ledger containing cryptographically encoded blocks of data in a chain. A block of data depends on the blocks before it, with information shared between all parties. It also incorporates so-called smart contracts, which are programed to generate instructions, such as payment, once conditions are met.

They enable various parties to see and swap information in almost real time and for this information to be updated instantaneously. They can also make and verify transactions on a network without a central authority or clearing house, and without the need for intermediaries.

It is impossible to manipulate the data because it is not stored in one place.
“If someone sells out of their position not only is their spreadsheet and that of the buyer updated, but so is every single other investor’s spreadsheet, in real time,” Shrem said.

Traditional private equity firms could harness the technology in a number of ways, one example being when preparing a portfolio company for sale.

“Instead of using data rooms you put the data in the blockchain. All pertinent information can be put on a blockchain, and made available to any interested party,” Gregory Nowak, partner and hedge funds practice leader at law firm Pepper Hamilton said.