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Crowdfunding Portals Set Sites on Secondary Markets

Man riding an arrow skywards with telescope

  |  By Christopher Orr, SDIP

As the doors open for more investors to buy stakes in early-stage start-up companies through equity crowdfunding and “mini-IPOs,” I’ve been keeping an eye on the development of secondary markets and venture exchanges that will give investors a clearer means of exiting these investments.

As I blogged about this summer, investors can now buy stakes in private companies through equity crowdfunding platforms, while Regulation A+ enables start-ups to raise up to $50 million in an IPO (sometimes referred to as mini-IPOs or an IPO “lite”) from both accredited investors and non-accredited investors.

However, a robust secondary market does not currently exist for easily trading these shares. Instead, investors participating in these deals need to be prepared, if necessary, to hold their shares until another exit occurs, such as the company going public through an IPO or being acquired.

For self-directed IRA investors who are familiar with the longer holding periods of certain investments, like private placements, participating in these offerings could align well with retirement investments, which tend to have longer time horizons. But having a clear means of exiting these investments would be helpful if extenuating circumstances arise.

While politicians and regulators weigh potential solutions, market participants are stepping in to provide secondary market liquidity.

CircleUp, a crowdfunding site that participates in the PENSCO Marketplace™, told CNBC earlier this month that it was introducing a secondary market that would enable shareholders to sell their stakes twice a year.

Companies that choose to enable secondary selling will be able to indicate that status when they raise capital on CircleUp’s platform, and secondary buyers will be able to see the available financial details before deciding to invest. CircleUp said about 15 to 20 companies were set to start using the new service.

PeerRealty, a real estate crowdfunding platform that also participates in the PENSCO Marketplace, has plans to launch CFX: Crowdfunding CrossMarkets. On its website, CFX says it will be an open and secure network that will provide secondary market transfers of private securities in alternative asset classes. Investors will be able to resell shares of offerings that were purchased on the PeerRealty portal as well as partner portals.

“We always knew,” PeerRealty said in a blog, “That equity crowdfunding would not reach its full potential unless investors had the potential for liquidity in their investments.”

While support for building a robust secondary market and venture exchanges may be growing, investors should remember that establishing such trading venues will not happen quickly. Investors who use their self-directed IRA funds to participate in equity crowdfunding deals or Reg A+ IPOs, should be sure the investment matches their risk profile no matter how the conversation evolves around venture exchanges and secondary markets.

PENSCO’s Blog is purely for educational purposes.  PENSCO does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Individuals are encouraged to seek professional advice before making any investment decision. Investments are not FDIC insured and are subject to risk, including the loss of principal.