We are living through the most exciting times in all of Angel Investing. This latest development will allow investors to get in on missed opportunities and bring some much-desired liquidity to the private equity space. Today we’ll look at Secondary Markets for Startup Investments –– Read on to learn more.
Startup investing is a long-term strategy.
It could be 5 years… 10 years… even longer in some instances before you know the outcome of your investment.
This is one of the biggest objections I hear from investors considering Angel Investing –– the lack of liquidity.
But I believe that will change over the next few years thanks to the development of Secondary Markets.
Simply put, secondary markets are places where investors can buy and sell shares of private companies.
Not only will this give investors a place to liquidate their shares, but it will also allow investors who may have missed a startup’s round of funding the ability to invest after the fact.
But before you go selling off your startup investments… you must realize that this capability is extremely limited right now.
I’ve covered the details of this exciting development in much greater detail in the latest edition of Angel Insights.
StartEngine is the latest equity crowdfunding platform to announce its addition of a secondary market. A private equity secondary market is a place where investors can buy and sell startup shares in between funding rounds.
The first company on StartEngine’s new platform will be StartEngine itself. All 20,000 shareholders of the company will have the opportunity to liquidate their investments, allowing new investors to come on board.
Netcapital and the UK-based Seedrs have already rolled out their own secondary markets, and AngelList has announced that it has one in the works.
These platforms, now joined by StartEngine, bring a groundbreaking feature to the private markets and hint at a future for angel investors that is ripe with opportunity.
How Will It Work?
Private equity Secondary markets are SEC regulated. Any startup that chooses can allow its investors to trade shares from Regulation Crowdfunding or Regulation A+ rounds.
On an equity crowdfunding platform, there is a special section that acts as the marketplace. Startups can choose whether they want to list on the secondary or not, permitted that it has already raised money on the platform.
Once a startup goes live on the market, sellers can choose to liquidate their investment and sell their shares. They can choose how many shares to sell and for how much, then they set a buy order and wait for a buyer.
To buy on the market, you will need to register and be approved. You will need to provide basic info, give your SSN, and answer a brief questionnaire.
It’s important to note that Regulation Crowdfunding shares cannot be resold for a minimum of one year. Buyers who invest in a company on the platform won’t be able to sell until this time is up. Regulation A+ shares, however, don’t have any such limitation and can be resold immediately.
Secondary markets will essentially work like public stock trading. Many traders will be tuned in, watching prices and waiting for the right moment to buy or sell.
Big News For Investors
For angel investors, this is exciting news. Secondary markets bring a new liquidation opportunity to the table.
Rather than needing to wait five to ten years for an exit event, you can sell whenever you want, as long as the company lists on the market. This can be a great way to get out of a deal that isn’t performing as you hoped to free up capital for a better investment.
But the real opportunity here is for buyers. Previously, most investors who missed out on Reg CF and Reg A+ rounds were locked out until the company went public.
Now, if you miss those early rounds, you can just head over to the marketplace to pick up some shares.
Not only that, but this will give early investors more flexibility and the ability to pick up equity for as little or as much as you want. These markets create a new type of private “micro-trading.”
Down the road, we will likely see more equity crowdfunding platforms roll out secondary markets.
These markets are great for all parties. They give investors a new liquidity event and allow them to invest after crowdfunding rounds have closed.
In the U.S., this concept is still new and will take some time to mature into its full potential.
I think this is a huge step forward and a sign of great things to come with our private markets. Private equity trading might just become the next big thing, giving even more power and flexibility to early-stage investors.