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A Secondary Market for Crowdfunded Companies?

SeedInvest was very encouraged by the recent recommendation of the SEC’s Advisory Committee on Small and Emerging Companies to establish a secondary market catering specifically to small businesses and startups.

The exact language of the recommendation is as follows: “The U.S. Securities and Exchange Commission should facilitate and encourage the creation of a separate U.S. equity market or markets for small and emerging companies, in which investor participation would be limited to sophisticated investors, and small and emerging companies would be subject to a regulatory regime strict enough to protect such investors but flexible enough to accommodate innovation and growth by such companies.”

More specifically, this separate secondary market would only be open to accredited investors who would be able to trade shares in startups and small businesses. Such accredited investors, meaning those who have a net worth, excluding their homes, of $1 million or more or income of $200,000 or more for at least two years, would be protected under added security measures, while the startups and small businesses would be encouraged to participate due to the lower costs of offering shares.

This could be a boon for crowdfunding since liquidity, meaning the ease of converting assets to cash, is often challenging for investors in private businesses. As SeedInvest CEO Ryan Feit explains in this article, the creation of a secondary marketplace helps both investors and businesses get around that issue:

“One of the largest risks to investing in startups and small businesses is the inherent lack of liquidity. Although we advocate for an exchange which is open to everyone, any new secondary market which provides an additional avenue for investor liquidity is a significant net positive.  More liquidity means more capital for private companies which means more job producing startups and small businesses.”

As the Crowdfund Insider article mentions, crowdfunding portals like SeedInvest can be part of this secondary market by allowing investors to buy and sells shares of startups and small businesses on those portals. Although it is easy to criticize the exclusivity of who can invest in the secondary market as something that will further hinder the imbalance of investor opportunities, one can argue that this is a constructive step in helping new businesses gain access to capital.


This post was written by SeedInvest on February 6, 2013

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