Capital Raise Contracts on Provenance Blockchain

Decentralized Bilateral Trades

Provenance Blockchain Foundation
Provenance Blockchain
6 min readApr 27, 2022

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In a previous post, Trading Coins and Bilateral Settlement on Provenance, we discussed how easily one could utilize Provenance Blockchain and smart contracts to create a decentralized exchange. The concept of a decentralized bilateral trade can reshape a number of legacy financial processes. A prerequisite to decentralized bilateral trades is that both sides of the trade must be digital assets. One could utilize other Provenance Blockchain concepts to tokenize various forms of assets from loan pools to NFTs, but the point of this article is to discuss the creation of value on chain directly using smart contracts developed for Provenance Blockchain by teams at Figure.

Why Digital Native Funds?

The traditional process for private funds to raise capital is notoriously plagued with inefficient manual processes and regulatory hurdles for both Issuer and Investor alike.

Some of the problems that are generally left up to the fund managers and their investors to navigate include:

  1. Onboarding and investor compliance.
  2. Filling out Subscription Agreements and other legal documents.
  3. Accepting Subscriptions and Issuing capital calls.
  4. Managing Distributions to investors.
  5. Providing access to secondary liquidity for investors.

There are a number of financial technology companies who have made significant progress improving existing workflows without fundamentally altering the framework. This leaves many manual processes fund managers and their fund administrators. At Figure we think that the entire process can be greatly simplified using Provenance Blockchain to displace the full lifecycle with smart contracts, smart wallets, and displacing trust with truth.

Provenance Blockchain and Figure Marketplace

I’d be hard-pressed to talk about how blockchain can revolutionize how capital is raised without mentioning the concept of digital identity, but this idea is large enough that we’ll tackle it in another post about Figure Passport. It is enough to know that the “Raise” smart contract takes into account investor eligibility criteria which can be validated against the wallet signing transactions via an oracle to investor data that is securely stored off chain.

Legal agreements such as subscription agreements naturally lend themselves to smart contracts. The document outlines terms, reps and warranties, certain conditions and qualifications of the respective parties, and provides a legal means of enforcing this arrangement. In my opinion, this somewhat antiquated legal agreement often has many parts that are no longer relevant when we can replace this system with the certainty of contract execution. For now, though, the world isn’t quite ready to ditch the paper for code, so we’ll continue putting some legal text on a page.

Initial draft of the Ramesses III SPV PPM and Subscription Agreements

Where the Rubber meets the Decentralized, Deterministic Database

So I’ve mentioned some of the major problems in this space, and how blockchain is already solving a few, but now let’s get down to the nuts and bolts of our contract solution by taking a little trip down the road less traveled, let’s call it the “Hardened Path” (pun intended)

To kick off this journey, the issuer (simply a Provenance Blockchain account) will instantiate the Raise contract, paying gas costs in Hash and supplying the contract parameters. These are things like the target raise amount, contract admin address, as well as any eligibility requirements (required tags) that need to be applied to investors (digital identity). Part of the instantiation of this contract is to create two separate denominations (denoms) on Provenance Blockchain that are used to hold the various states of the fundraise by the Raise contract and eventually by the investors themselves: commitment coin and investment coin.

Investment coin is the digital asset that will ultimately represent the final state of investment into a particular offering, but the beauty of this contract design is that it also accounts for fund raises that decouple commitment of capital from investment of capital. The point here is to track the entire lifecycle, and many assets are more complex than a simple record of ownership.

Once the Raise contract is initialized, it’s time to collect some subscriptions. An investor will propose a subscription request to the Raise contract that in turn instantiates a new Subscription contract per investment. Any wallet can submit an order request to the Raise, but it is recommended to pair this stage of the investment with verification of eligibility attributes, as the next stage of the contract execution will validate these attributes against the raise parameters, preventing addresses that do not meet the eligibility criteria of the offering from proceeding at the core raise level.

The current design still assumes that an issuer will review and accept subscriptions to complete the initial phase of the subscription process, but imagine a future state where the issuer does not need to scrutinize subscription materials to ensure compliance and can rely on the truth of the contract to enforce eligibility. Any qualified investor could simply send an acceptable coin payment directly to the raise in exchange for fund shares. This is the future Provenance Blockchain is bringing about.

The Value Exchange

We’ve talked about how subscriptions are proposed and accepted, but where is the actual value we hoped to digitize? Upon acceptance of a subscription to the raise contract, commitment coin is minted (or previously minted on raise creation in some cases) and transferred to the subscription smart contract (smart wallet) for the investor. This commitment coin is representative of “uncalled capital” in a fund structure and immediately holds value for the raise.

In order to accommodate all types of raises, a capital call structure is built into the subscription contract, but it is totally up to the issuer to determine the frequency and terms of these calls. An open end fund would just call 100% of the subscription amount to be immediately exchanged for investment coin after receiving the payment coin to the subscription contract. This can be in the form of a stable coin or USDF, but in reality the value exchange could rely on any asset denomination on Provenance Blockchain. (Or consider another Figure product like a crypto loan!)

The Genesis of a Digital Asset

The subscription contract functions like a smart wallet escrowing the various coins, but also helps to orchestrate the exchange of commitment, investment, and payment coins. This is hardly the last stage of this journey, however, as various capital activities will occur over the life of this investment. Redemptions and distributions are issued as easily as a coin transfer with the entire state being tracked and managed by the contract.

One of the largest benefits to a digitally native fund is easy access to secondary liquidity through an exchange. Most long duration private funds (private equity, VC, real estate, etc.) have either no or very limited secondary markets. Transactions are heavily brokered, can be by appointment only, and involve a lot of paperwork and long settlement times. Because our investment has already been fully represented as a digitally native token on blockchain, the process has been drastically simplified. To open up secondary liquidity for a digitally-native blockchain fund, we really just need to create bids/asks against an exchange contract. Figure has already proven how this full lifecycle can work by raising primary equity on Figure Marketplace, managing the cap table via Figure Equity Solutions, and finally listing shares in a secondary market via the Figure ATS. All made possible by Provenance Blockchain and smart contracts.

Conclusion

We have now seen how a set of smart contracts can facilitate the creation of a digital asset on Provenance Blockchain, but I bet you are asking: “That’s great, but how can we get started?” For fund managers head on over to figure.com/invest to check it out. For developers, take a peek at the open source smart contracts (raise, subscription) and instantiate them directly on Provenance Blockchain, or we’ve also wrapped much of this design in an open API for when you want to take the plunge, but aren’t quite ready to compose and broadcast transactions.

MATT HELLWINKEL

Matt is a software engineer from Montana working on the Figure Marketplace. He currently oversees the DFS and Passport engineering teams, and occasionally gets to write a line of code or two. Outside work, he enjoys gaming, Arduino projects, and bussing his girls to various gymnastics/ballet events.

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Provenance Blockchain Foundation
Provenance Blockchain

The public open-source blockchain used by over 60 financial institutions. Billions of dollars of financial transactions have been executed on Provenance.