Equity Crowdfunding Secondary Markets

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Equity Crowdfunding Secondary Markets

Equity crowdfunding has emerged as a powerful tool for connecting entrepreneurs with potential investors and democratizing the investment landscape. However, one of the major challenges faced by investors in traditional crowdfunding models is the lack of liquidity. Enter equity crowdfunding secondary markets – platforms that allow investors to buy and sell shares in privately held companies. In this article, we will explore the concept of equity crowdfunding secondary markets, their benefits, challenges, and the impact they have on the investment ecosystem.

I. Understanding Equity Crowdfunding. To grasp the significance of equity crowdfunding secondary markets, it’s important to first understand the basics of equity crowdfunding. Equity crowdfunding is a mechanism that allows individuals to invest in early-stage companies in exchange for a share of the company’s ownership. This model has gained popularity due to its ability to offer investment opportunities to a wider pool of investors who were previously excluded from traditional venture capital markets.

II. The Emergence of Secondary Markets. While equity crowdfunding offers exciting investment prospects, it traditionally lacked a secondary market where investors could sell their shares. This absence of liquidity limited investors’ ability to exit their investments and potentially realize profits. Recognizing this limitation, secondary markets for equity crowdfunding have started to emerge, offering investors a way to buy and sell shares before the company goes public or gets acquired.

III. Benefits of Equity Crowdfunding Secondary Markets

  1. Enhanced Liquidity: By providing a platform for investors to trade shares, equity crowdfunding secondary markets offer increased liquidity. Investors can now exit their investments earlier than previously possible, reducing their exposure to risk and potentially unlocking capital for future investments.
  2. Diversification Opportunities: Secondary markets allow investors to diversify their portfolios by buying shares in multiple companies. This diversification mitigates risks associated with investing in a single company and promotes a more balanced investment strategy.
  3. Access to Early-Stage Investments: Equity crowdfunding secondary markets open up access to investments in early-stage companies that may have significant growth potential. Previously, these opportunities were limited to venture capitalists and angel investors, excluding many retail investors from participating in the early stages of a company’s growth.
  4. Price Discovery: Secondary markets provide a platform for price discovery, allowing investors to gauge the market value of privately held shares. This transparency enhances investor confidence and enables better-informed investment decisions.

IV. Challenges and Considerations

  1. Regulatory Framework: Equity crowdfunding secondary markets operate within a complex regulatory environment. The regulations governing these markets may vary from country to country, making it essential for investors to understand the legal and regulatory implications before engaging in trading activities.
  2. Market Efficiency: As secondary markets for equity crowdfunding are relatively new, they are still developing and may lack the efficiency and depth of traditional stock exchanges. The market liquidity and trading volumes may be limited, impacting the ease of buying and selling shares.
  3. Valuation Challenges: Valuing privately held shares can be challenging due to limited public information and the absence of standardized valuation methods. Investors need to conduct thorough due diligence and rely on the expertise of the platform and professional advisors to assess the potential risks and rewards associated with a particular investment.
  4. Investor Protection: Given the inherent risks associated with investing in early-stage companies, investor protection becomes crucial. Platforms operating secondary markets should implement robust investor protection mechanisms, such as rigorous due diligence, transparency, and disclosure requirements, to safeguard the interests of investors.

Equity Crowdfunding Secondary Markets

Equity Crowdfunding Secondary Markets is the Evolutionary Next Step

While the prevalence of equity crowdfunding has increased, investors have had very few opportunities to exit such investments. Thus, several equity crowdfunding platforms have started considering the development of secondary markets for buying and selling shares. We investigated whether plans to list on the secondary market increase investor participation and thus the amount of money entrepreneurs raise during their equity crowdfunding campaigns. Unfortunately there is very little empirical data in the United States with StartEngine seemingly the only player in this space.

We find that in the early days of the secondary market, communicating a listing plan attracted more investors and larger investment sums. However, these effects largely disappeared after the first two years of secondary market operation. We interpret this to stem from investors’ recognition of the insufficient liquidity of the secondary market and thus its probable inability to constitute a viable exit route. This lack of obvious exit strategy is why equity crowdfunding investments in America are largely a one way street for anywhere between five and ten years at which time an extraordinary opportunity  (IPO, acquisition, etc.) presents itself.

In practice, many entrepreneurs skip listing on a secondary market, especially since most campaigns are not sufficiently successful, which implies significant costs associated with a listing. Research offers valuable insights to platforms aiming at launching secondary markets and regulators responsible for validating relevant initiatives. It is clear that equity crowdfunding will come of age when participation in equity ownership can be increased through well-functioning secondary markets, which however are difficult to achieve within equity crowdfunding.

StartEngine Secondary

StartEngine Secondary is one of the first marketplaces of its kind that enables companies that have raised capital via Regulation A+ and Regulation Crowdfunding to give their investors potential access to liquidity.

The company worked towards the launch of this marketplace for 3 years, and they launched their trading platform in the fall of 2020. They earned bragging rights in becoming  a platform that can not only support funding rounds, but also provide potential access to liquidity for shareholders as well.

One of the first markets in the US where non-accredited investors can publicly trade investments in startups that have raised capital via Regulation Crowdfunding and Regulation A+. StartEngine Secondary is an alternative trading system regulated by the SEC and operated by StartEngine Primary, LLC, a broker dealer registered with the SEC and FINRA.

At first, only one company will be trading on StartEngine Secondary, and they plan to add many more in the future. They are pioneers in the crowdfunding industry, and they are poised to bring the chance for liquidity to the crowdfunding ecosystemand hopefully to many more investors in the future.

Traditionally, startup investors had to wait 5-10 years in order to see a return on their investment. They often had to wait for a liquidity event, such as the startup being acquired by another business or the company going public via an IPO. 5-10 years is a long time to wait.

StartEngine hopes to change that with StartEngine Secondary. With their platform, users can not only invest in companies on StartEngine, but also trade with other investors if they are available. Investors should be aware that the only bids for their shares may be less than what they originally paid.

Conclusion

Equity crowdfunding secondary markets have revolutionized the investment landscape by providing investors with increased liquidity, diversification opportunities, and access to early-stage investments. While these markets offer exciting prospects, they also come with challenges, such as regulatory complexities, market efficiency, valuation difficulties, and investor protection concerns. As these secondary markets continue to evolve