One of the biggest challenge for the equity crowdfunding industry is its illiquity. In this respect, Seedrs’ CEO and Co-Founder, Jeff Lynn, pointed out
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.
This could potentially have a negative impact on the sustainability of the market in the long term, as highlighted also by equity crowdfunding pioneer Jouko Ahvenainen, who ealier this year had told Oliver* that
the impossibility to have liquid secondary markets (…) makes business with crowdfunding quite problematic.
The London-based company, which is backed by high-profile fund manager Neil Woodford, City grandee Lord Rothschild, Augmentum Capital, and Faber Ventures and recenlty opened up shops in Berlin, Amsterdam and New York, will firstly provide a “beta” version of its market which will be open just for one week a month, beginning on the first Tuesday of every month. During this time, only current investors in a given company will have the opportunity to buy and sell shares in it.
Seedrs’ CEO and Co-Founder, Jeff Lynn, who considers this to be the “natural next step” of equity crowdfunding, wrote in a blog post:
The market, which will form part of the Seedrs platform, will enable investors who have shares held under the Seedrs nominee to buy and sell shares from and to each other. Meanwhile, investors in Seedrs-funded companies will have the opportunity to increase their stakes by buying shares from those sellers.
Lynn added that:
The long-term nature of this asset class means the vast majority remain illiquid for some time. A secondary market has the potential to change that, giving investors the prospect of early returns. Meanwhile, investors who may want to increase their stake in a business will now have the opportunity to do so.
The other way around, for companies that have already raised capital via Seedrs, this will mean that they
will find themselves under less pressure to deliver an early (and possibly premature) exit for their investors.
However, according to some experts, secondary market liquidity will demand a “deep discount.”
— Venture Crowd (@venturecrowd) May 8, 2017
Furthermore, the FT writes,
The Financial Conduct Authority said it was concerned that investors might find it difficult to assess the risks and returns they were taking on by investing through a crowdfunding website, and that some start-ups’ financial promotions may be misleading.
Seedrs’ Lynn is aware that there are potential pitfalls for investors, the leading financial title City A.M. reports, so that launching a beta plaftorm in his view will be useful to
observe behaviour and make improvements as we go.
Today’s announcement came after previous ones made by other players within the industry, namely the British market leader Crowdcube in July 2016 and, more recently, the leading Swedish platform FundedByMe, as also reported by Oliver*.