LONDON — British crowdfunding platform Seedrs is launching a secondary market, allowing investors who back startups on the platform to cash out earlier than they otherwise would be able to.
Seedrs announced on Monday that it is launching a secondary market, giving investors the opportunity to trade private shares.
This allows investors more control over when they make a return from their investment. Currently, crowdfunding investors only have money returned to them when a company they back is bought or decides to list publically, a decision taken by the management.
Seedrs CEO and founder Jeff Lynn says in an emailed statement: “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.”
Seedrs will launch a beta version of its secondary market shortly. It will open for one week each month, giving investors a fixed window in which to try and sell their shares. Seedrs will value the shares for trade based on its EY-approved valuation methodology.
The secondary market will not allow new investors to come in. Only existing investors in a company will be able to buy more shares in it. As with any market, investors will only be able to sell — and unlock their money — if they can find willing buyers. Just how liquid the market will prove to be when restricted to only existing investors remains to be seen.
Lynn says in a statement: “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.”
Seedrs will take care of all the paperwork associated with the share trades, meaning companies who have raised money on the platform will no have to get involved.
A race for returns
Seedrs is not alone in trying to set up a secondary market for crowdfunding shares. As the sector matures, platforms are increasingly keen to demonstrate that equity crowdfunding can deliver returns to investors. While there have been a few exits, such as Camden Town Brewery, there have also been many failures. The majority of investors also find their capital locked up indefinitely with little visibility on possible returns.
Secondary markets allow investors to potentially take some money off the table, making crowdfunding a theoretically more attractive prospect. Crowdcube, Seedrs’ largest rival, has long talked about setting up a secondary market and last month held its first secondary sale on the platform.
However, Seedrs warns in its release touting its secondary market feature that “a secondary market for shares in private companies has historically been highly illiquid.”
Crowdfunding is one of the fastest growing areas of investment in the UK, according to investment tracking platform Beauhurst, with activity growing by 11% in the first quarter of 2017. Seedrs was the most active platform, with 35 campaigns.