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Liquidity and crowdfunding

Liquidity and equity crowdfunding

The question of liquidity and equity crowdfunding is at the forefront of any industry newcomer’s thoughts. Traditionally restricted by outdated laws that prohibit investors from selling or buying private shares stymies investor interest in buying into privately-held industries, and the absence of a secondary marketplace for equity crowdfunding investors has been a deterrent for the industry.  Invesdor is here to take a closer look at opportunities for liquidity for those with active interest in the crowdfunding sector, and alternative appeals of the industry as it continues its expansion.

The scepticism of an average investor who shies from investing in privately-held companies, for fear their funds will simply be held in perpetuity, has been one of the many reasons why non-accredited investors have not been active in traditional finance.  Liquidity options are important for drawing retail investors back into the scene.  The current absence of a platform and secondary market for shares from equity crowdfunding ventures does little to reassure investors who are new to the crowdfunding game.  The success of equity crowdfunding as a primary market is therefore dependent, to an extent, on the presence of a successful secondary market through which investors are able to sell their shares. 

Nonetheless, the potential for return in equity, for non-accredited investors, defines the democratic nature of the crowdfunding industry.  The stunning growth witnessed by various startups in recent years is testament to the fact investors are better off with the skin in the game permitted by equity crowdfunding, rather than mere rewards-based funding rounds of the past. The inability to sell shares acquired from an equity crowdfunding raise on a public exchange does act as a deterrent to those who, despite watching their investment thrive, are unable to cash in on their equity until an exit event.  The necessity of waiting years before liquidity requires a different mindset from the investor.

 

Secondary marketplaces are coming

Recently, platforms permitting investors to sell shares on a secondary marketplace have started to emerge, and Invesdor is currently working on one as well.  There are constraints on such platforms however, as they are open to accredited investors typically, or simply lack the investor volumes necessary to provide liquidity.  The ease with which investors are now able to invest in a company is not yet matched by a platform that allows them to extract the funds just as easily.  Similarly, where the company isn’t viable for an IPO or where their model doesn’t allow an exit, liquidity will remain an elusive proposition for the investors. 

Equity crowdfunding has proven to be brilliantly adept at evolving – the proliferation of platforms worldwide, the evolution of syndicated and institutional investment, and the improved regulation worldwide, demonstrate that scepticism over its viability is redundant. The next chapter of crowdfunding history should involve the development of a secondary market that allows liquidity for the devoted investors of crowdfunded companies.
 

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Richard Andrée Wiltens

Written by Richard Andrée Wiltens

Richard Andrée Wiltens is a commentator within the fintech sector, who has written for an array of international investment platforms. His career has spanned from investment banking to financial technology firms, backed by an education in economics and finance.