How Crowdfunding’s Secondary Market May Evolve

Wall Street

One of the interesting points that emerged from last week’s Sunshine Act meeting of the SEC Advisory Committee on Small and Emerging Companies was the following recommendation:

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.

In referencing “sophisticated investors,” the SEC is specifically referencing accredited investors. The SEC cannot make an exchange, but this recommendation suggests a willingness to help solve a big problem for small business. Small business equity is illiquid, and this fact hinders economic growth.

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.

Ryan Feit, CEO – SeedInvest

See all four recommendations from the SEC’s recent Sunshine Act meeting

During the meeting, the possibility of unlimited participation in an exchange such as this was discussed. Whether or not a new exchange for small companies is created and no matter who is allowed to participate, a vision for what happens to investment crowdfunding shares after the initial offering is becoming more clear.

There are now three paths the secondary market can take:

  1. Investment crowdfunding portals list their own shares
    This is the approach Symbid is taking, where investors that purchase shares of companies listed on the Symbid platform can also sell those shares on the same platform. Crowdfunding portals would then act as primary and secondary markets.
  2. Shares are listed on a private securities marketplace
    Think SecondMarket, who recently announced a partnership with CircleUp. The crowdfunding portal is the primary market and a private marketplace acts as a secondary market in a strategic partnership.
  3. Shares are listed on a stock exchange
    Small businesses would list their shares on an exchange with less regulatory overhead (and less cost) as compared to a NYSE or NASDAQ.

nyse

Reaction to the recommendation has been pointed, with many criticizing the accredited limitation as just one more way the cards are set to be stacked against our proverbial Main Street investors. Daryl H. Bryant, CEO of equity crowdfunding platform StartupValley, thinks this type of exchange has a limited upside. “Implementing an exclusive exchange like this will not foster entrepreneurship or job growth in this country and will just continue to increase the number of investment opportunities for accredited investors,” he said.

Vincent Molinari, CEO of GATE Technologies, thinks the recommendation may just be the first step in a larger process. “What I think they’re messaging here is we have to get this right and we’re not so sure how to do that, so let’s start with a level of investors who… preconceived, right or wrong… may be able to take more risk given their net worth profile.”

“Start there, let it iterate, get it right, and then perhaps open it to the individual investor which effectively really gets to the point of democratization of capital formation,” he said.

On thing seems certain: the SEC is taking the first steps toward facilitating and encouraging a new stock exchange for small business. If created, it could help alleviate the liquidity problems facing small companies in the United States today. Partnered with crowdfunding, this could transform how entrepreneurs raise capital and how investors participate in their journey.

Featured image courtesy Manu_H on Flickr | NYSE Image courtesy digitizedchaos on Flickr

  • Nadaar Shalab

    if the zionists continue to usarp the crowd funding and crowdinvestments sites how can people share in the profit of new industry?

    The zionists and illegal entity are feeding from the milk of the labor of the rest of the world

  • Pingback: How Crowdfunding's Secondary Market May Evolve - Crowdfund Insider | Crowdfunding, Startup Funding & Entrepreneurship | Scoop.it()

  • Pingback: How crowdfunding’s secondary market could evolve | Legit Feeds()

  • Pingback: The Capitals™ – Capitalists' Magazine | 資本家札記 | How crowdfunding’s secondary market could evolve()

  • Pingback: How crowdfunding’s secondary market could evolve | 5 For Business()

  • Pingback: How crowdfunding’s secondary market could evolve | CrowdBacon – The Startup Blog()

  • Pingback: How crowdfunding’s secondary market could evolve | VentureBeat()

  • Most points made above, while fair, are still neglecting the fact that just as small businesses who currently sell products through websites like Amazon are at the mercy of a critically vocal public, so too will new business ventures be subject to the social dynamics of Crowdfunding portal patrons, good and bad.

    Although the larger public (non-accredited investors…98% of the population) may not possess the sophistication of seasoned investors (deemed “sophisticated” often soley by virtue of the value of their self-reported assets qualifying them as “accredited”), proposed limits on amounts raised and amounts invested should provide most of the protection that the “new marketplace for the rest of us” would need…and beyond that, the comments, thumbs-up, likes, flames and other socially generated triggers will surely alert anyone with a vested interest in their startup of choice to risks on a minute by minute basis…far more efficiently than what quarterly reports or yearly shareholder meetings would by contrast.

    I still believe that modeling our new marketplace after those of other countries who are actually leading the charge in equity crowdfunding would be a wiser move. Trust but verify. Otherwise, by the time we’ve stifled the potential job creation and economic stimulus that less bridled regulations could’ve generated, our foreign competitors will have narrowed what little margin our economy still has.

    We’re known for innovation. It’s time that the same “leaders”, who voted in a rare bi-partisan effort to approve the JOBS Act, are held accountable for for their silence since. Call your representatives and ask why they’re sitting back while the agents of status quo (Big Banks, Wall Street lobbyists, Broker-Dealers, Securities Lawyers) plead to our bureaucrats (often the same agents who circulate frequently through the revolving door at the SEC) for unnecessarily restrictive baby steps, specifically in the face of the success stories abroad where zero cases of fraud have been reported in years of funding startups of all kinds. My 2¢

    • Amen to most of that. The only feasibility problem I see is ironically also our biggest sales pitch, which you’ve executed really well.

      I’ll begin by saying that it’s a systemic problem. The crowd making decisions by virtue of upvotes and thumbs-up actions is still susceptible to manipulation by nefarious characters. In fact, that whole system is susceptible to manipulation through what we call the hive mind. And that hive mind can be controlled.

      A hypothetical:

      I sign up to an equity crowd funding portal and before I do so I have my ducks in a row – I have all the paperwork and contrived credentials that one would associate with a con artist worth his weight in manure. I have everything the portal asks for in terms of verification and qualifying documentation.

      Now, after I publish my listing, complete with high resolution images and a sweet video pitch, I outsource my product’s perceived popularity. I outsource comments, recommendations, upvotes, thumbs-up, testimonials, compliments, a couple thousand Twitter followers, 3-4 thousand Facebook likes, about 6 press releases and if I go the extra mile, I outsource guest blog posts as far and wide as possible; that I then use as points of reference in case future doubts and aspersions are cast in my direction. I can even spoof pre-orders and offer “verified” PayPal histories to accompany it. I can connect with serious investors through Skype and show them my company’s banking history through shared screens.

      Before you know it, I’ve created what seems to be an existing and/or burgeoning market for my product and I can do all of this in a matter of days. By then, I’m well into presenting my company as a feasible investment opportunity. Regardless of your sophistication as an investor, I believe we’re all prone to falling for a good scheme if we’re in the right place at the right time.

      Now, I sell equity in a locally registered LLC through a shell that I set up operating from abroad. I will get caught because I might not be so familiar with the nuances of international banking fraud. So, there’s almost no doubt about it. But not before I get the investment funds wired to an account that will be virtually untouchable.

      So the money is gone, the portal loses its credibility so it shuts down and the media (who has a vested interest in keeping the status quo) labels equity crowd funding “rife with fraudsters and con artists” (I can see the banner flashing on Times Square already) because of one incident that involved a guy who semi-got-away-with-it.

      I own a portal, and these are the things that keep us up at night. How do you eliminate that instance or at least do everything you possibly can to limit the opportunity for fraudsters without stifling innovation or negatively influencing participation? Because it only takes one.

      • Excellent response and I feel for your sleeplessness. I would say that while it is possible a fraud may use the path you’ve iterated, your iterating it should in itself help the public expose such schemes. But aside from that, the worst case scenario as i understand it is that a fraudster can only accomplish this one time, as his SSN will be an anchor to his identity, will it not, as a vested interest in the LLC? It’s a good question and i’d love to hear someone with securities registration knowledge chime in. It also seems a lot of work each time he wants to run this scam for the amount of money he might net. We’re still talking about small businesses and low threshold offerings, are we not?

        • “a fraudster can only accomplish this one time, as his SSN will be an anchor to his identity, will it not, as a vested interest in the LLC?”

          That’s assuming our fraudster is incompetent enough to use his own name and SSN. The report from the Bureau of Justice Statistics regarding identity theft is sobering:
          http://bjs.ojp.usdoj.gov/index.cfm?ty=pbdetail&iid=2222

          If you look at those numbers from a business perspective, that’s a sizable industry and more important, one that doesn’t care about the SEC and their regulations.

          To that point; I realize that regulations mitigating risk are already in place and actions like mandatory background checks for issuers will go some way in shutting down the majority of idiots who think of this con as easy money. But those are not the people I worry about. I’m concerned about the creative and resourceful ones.

          Also, you don’t necessarily need a SSN to register an LLC. Which is something else our fraudster can outsource for $69.00. Note, “rush service available”:
          https://www.myusacorporation.com/employer-id-number.html#bm8

          “We’re still talking about small businesses and low threshold offerings, are we not?”

          “Small” is a relative term since they can raise up to $1Million at a time. For those involved in petty crime on the internet, like buying and selling CC numbers, that $1MIllion represents what a 401K does for most law abiding individuals.

          From that point of view, the temptation to enter our world, especially if he/she already has their feet wet on the shady side of the divide, must be enormously tantalizing.

          I’ll leave you with this:

          If your identity gets stolen, (and for the sake of clarity lets mention that the theft includes your SSN) months could go by before you even know it. Therein hides this window of opportunity for anyone willing to go to these lengths for $1Million.

          Now, I think there are a number of things we can do to narrow that window, but I’m not sure that these fall within our industry’s purview.