StartEngine, a leading crowdfunding platform that is also a FINRA regulated broker-dealer and holds an ATS (alternative trading system) license, will launch the “StartEngine Secondary” in October.
According to StartEngine, the first issuer to trade on the platform will be StartEngine itself – a company that has raised capital from a wide audience multiple times.
To quote StartEngine:
“StartEngine Secondary will be one of the first public trading marketplaces in the US for companies that have raised capital via Regulation A+ and Regulation Crowdfunding. Today if you invest in a company on StartEngine, typically you can’t exit your investment until that company experiences a liquidity event, such as being acquired by another business or an IPO. Those events can take anywhere from 5-10 years to occur, if they occur at all.”
StartEngine is addressing a particular pain point for securities issued by private companies – a lack of liquidity. Reg A+ is a unique exemption in the fact that securities issued under the rule may immediately trade on an exchange – or an ATS. Reg CF is a bit different as securities must be held for at least one year.
Regardless, investing in private securities tends not to be a good option for impatient investors but by providing a marketplace where shares may trade can help to mitigate this issue. One of the challenges that StartEngine Secondary may encounter is a difficulty in making a market in a security with a small float. Trading necessitates both supply and demand and private securities tend to have fewer shareholders interested in selling their shares (or buying more) as well as a smaller market of interested investors.
Perhaps the most effective secondary market based on a crowdfunding platform is Seedrs in the UK. Launched in 2017, the marketplace has iterated and updated to foster a more robust trading platform and grow volume in the past few years. Just recently, Seedrs announced it would now trade in securities that have not been crowdfunded on its platform providing a service for private companies in need of a trading venue.
StartEngine is not alone in its mission, other platforms, including blockchain-based ones, are seeking to accomplish the same. But StartEngine is positioned to become the first traditional online capital formation platform to combine primary issuance with secondary transactions.
This is a development to watch and not an easy task but something that can be transformative for the investment crowdfunding industry.