Today, leading equity crowdfunding platform Seedrs announced a pioneering move for the sector with the launch of a secondary market this summer.
Until now, the shares investors purchase have been very difficult to trade, meaning that they need to wait for an exit event such as an IPO or a sale of the business. Whilst Seedrs has already seen portfolio companies Chapel Down and FreeAgent achieve success on the public markets, allowing those investors to sell their shares and realise a profit, the long term nature of this asset class means the vast majority remain illiquid for some time.
The Seedrs secondary market seeks to change that. It will allow investors the opportunity to sell shares in companies they’ve invested in via Seedrs to other investors. Meanwhile, investors in Seedrs-funded companies will have the opportunity to increase their stakes. As in any market, the ability to buy or sell will depend on there being sufficient supply or demand.
The secondary market will launch as a beta version this summer. For purposes of the beta, Seedrs will put several key rules in place:
● The market will be open for trading for a one-week window every month. The window will start on the first Tuesday of each month, which Seedrs calls “Trading Tuesdays”.
● Shares will trade only at “fair value”, which is the price that Seedrs marks them pursuant to its Valuation Policy. Big 4 accounting firm EY has confirmed that the Seedrs Valuation Policy is consistent with the industry-standard International Private Equity and Venture Capital Valuation (IPEV) Guidelines. More information about the Seedrs Valuation Policy is available in its latest Portfolio Update, available at http://portfolio.seedrs.com/.
● Only current investors in a given company will be allowed to buy shares in it.
● Some companies will be ineligible for trading at certain times. This will generally be the case where the company is in the process of a major corporate transaction or other extraordinary circumstances are in place.
Seedrs will observe market behaviour closely. Depending on how it functions, Seedrs may look to expand the timing (longer windows or continuous trading), pricing (negotiated or bid/offered prices) and/or eligibility (new investors, when companies are ineligible) after the initial beta launch.
Seedrs decided to launch its secondary market after seeing strong demand from its investor base. Investors have increasingly been posting offers to buy or sell shares in portfolio companies on those companies’ post-investment pages on the Seedrs platform. Seedrs felt that, given the clear desire among investors to conduct secondary trades, the platform should help facilitate them.
While the secondary market is an investor-focused product, it has substantial advantages for entrepreneurs as well. Those companies that have already raised capital through Seedrs will find themselves under less pressure to deliver an early–and possibly premature–exit for their investors, as the secondary market provides those investors with another possible route to liquidity.
Meanwhile, companies who are considering raising money through Seedrs will benefit from an expected increase in available capital, as more investors are attracted to this asset class due to the prospect of secondary trading (the lack of which has long been a deterrent for many investors).
Seedrs’ comprehensive nominee structure means that the platform will take care of the whole process, without the company whose shares are being traded needing to get involved with any of the administrative matters. In the absence of such a nominee, the mechanics of trading shares would be substantially more complicated.
Says Jeff Lynn, CEO and Co Founder of Seedrs:
“We have listened to our huge investor base, who have increasingly been showing a desire for a mechanism to buy and sell shares in our portfolio companies.
“The potential opportunities that a secondary market brings for buyers, sellers and entrepreneurs alike makes this development incredibly exciting. Perhaps most importantly, we believe this will help businesses who are raising capital through Seedrs: with the prospect of secondary sales now available, we expect more investors are likely to want to back the great businesses we work with.”
“Secondary markets are challenging to operate successfully, and we are very conscious of our obligation to provide our investors the best experience we can. That is why we are launching this product in beta form initially, so that we can observe behaviour and make improvements as we go.
Tim Levene, Managing Partner of Augmentum Capital says:
“Seedrs announcement today is a game changer for the equity crowdfunding space. In order for the industry to truly scale, a secondary market is essential and will create a real opportunity to provide early investors with returns, and make this asset class more attractive to new investors. I am delighted Seedrs is again delivering a pioneering new product and look forward to seeing it develop from strength to strength over the coming years”
Julian Sutton, a Seedrs investor and Business Consultant comments:
“Seedrs has until now offered me an exciting opportunity to build a diverse investment portfolio in a previously inaccessible asset class. However in the short term, whilst I could claim up to 50% tax relief from eligible companies, I have had to sit tight to see long term yields materialise. With the launch of a secondary market, I can realise returns in my portfolio by selling shares without having the wait for the business to actually exit.”
Jamie McInnes, Managing Director of Seedrs portfolio company SellMyLivestock, says:
“We are delighted that Seedrs is facilitating a secondary market for Sell My Livestock investors. We successfully raised over £420,000 on Seedrs from more than 550 investors including tennis star Andy Murray, and those investors have seen material appreciation in the value of our shares. A secondary market will offer some of our existing shareholders an opportunity to exit the business, even as we, the company, continue to work to grow it. ”
Whilst Seedrs is pioneering in the equity crowdfunding space, and a secondary market is undoubtedly a key part of the sector’s long term sustainability, investors should be aware that a secondary market for shares in private companies has historically been highly illiquid. It can be difficult to find a buyer or seller when desired, and investors should not assume that an early exit will be available just because a secondary market exists.