Earlier this month, Crowdfund Insider held a webinar to discuss the trading of private securities. Crowdfunded securities fall in this category because any security issued online via a platform or directly must be an exempt offering. This means securities issued under Reg CF, Reg A+ and Reg D, can be traded via an Alternative Trading System (ATS) or, in the case of Reg A+ – via a regulated exchange.
While the discussion surrounding the primary issuance of private securities and the secondary trading of these assets can be technical and convoluted at times, there were a good number of questions the panel was not able to answer due to time limitations. Therefore we are taking a minute to review some of these inquiries to provide a response.
The webinar in its entirety is embedded below so if this is a topic of interest it is an informative show.
First, there was a question regarding fraud alluding to the degree of fraud in the digital asset or crypto-asset sector. First, our topic involved regulated securities. These assets must adhere to existing securities law – enforced by the Securities and Exchange Commission (SEC). These are not crypto markets which is a different topic. To operate an ATS, as the aforementioned platforms do, you must first be a FINRA-regulated broker-dealer and then be approved to operate an ATS. This is no small task. FINRA does not mess around. At all. The rigorous process to gain approval can take years and transactions in securities compel a high level of compliance and security. While we frequently hear stories about crypto hacks or thefts, we are discussing regulated securities traded on a compliant marketplace.
One person inquired about the full stack of issuance and trading and the platforms that participated on this webinar. The three platforms offer both primary issuance as well as secondary trading and various elements of securities management and promotion. StartEngine, temporarily paused its secondary platform due to internal updates but it is scheduled to go-live (again) on June 1st. So for issuers interested in issuing and then allowing trading of their securities these three platforms offer these features. There are other securities crowdfunding platforms in the market that offer this service as well.
Are these secondary platforms open for trading during market hours? This depends. Some platforms offer designated trading days/times. Fore example, currently, Securitize is open for trading on weekdays from 8 AM to 8 PM along with 24/7 order taking. Over time, there is an expectation that 24/7 trading will become the norm and not the exception but we are still in the early days of trading in private securities.
A question was asked about liquidity – IE enough supply and demand for a market to be made. As these are private securities with fewer shares and investors, an immediate transaction may not be feasible. This is not trading in Amazon or Tesla. But, investors may post an offer to sell and someone may post an offer to buy, and over time these order books may make a match. Again, expectations are for this market to grow in the ensuing years as more firms remain private longer. This market is expected to grow as public markets have declined in the number of listings in recent years due to the high cost and amount of time required to maintain a public listing. Many people predict the cost will continue to rise making public markets even less enticing f0r issuers.
Several people asked questions about what could policymakers do to expand or improve this market. Of note, the JOBS Act 4.0, currently under discussion, includes legislation for venture exchange regulation – The Main Street Growth Act (S.3097). This bill aims to enable the registration of national venture securities exchanges for the purpose of trading the securities of certain small companies, like startups and emerging growth companies. The aim is to allow issuers to apply to the SEC for approval to trade on these exchanges. The language of the bill may be viewed here. This is subject to change and there is no guarantee that it will ever become law but some members of Congress do believe there is merit in allowing smaller companies to trade securities in a scaled disclosure environment.
Are there any white-label options available? Yes, there are. Securitize, an ATS that participated in the webinar, is one provider that will license its services to power trading operations. We suggest you contact them for more information regarding what they can and cannot offer.
Can Reg CF securities trade on a secondary market? In general, yes – if the issuing company approves it and if the security is held for a certain amount of time (one year). There are certain situations where they can be transferred before. Speak to a platform or securities attorney if you would like more information on this. One of the compelling aspects of Reg A+ Tier 2 is that securities may immediately trade on either an ATS or exchange following an offering. While this is no set minimum for a Reg A+ offering you would certainly want to cover your costs and raise the amount of growth capital you need. Reg A+ issuers typically raise millions of dollars or tens of millsion. A Tier 2 issuer may raise up to $75 million.
If you have more questions about the topic, please email us at [email protected] and place Secondary Trading in the subject line. We will do our best to answer additional questions. The webinar is embedded below.
Join us for our next webinar: “Building your own Community of Advocates” Tuesday, 7th June 2 pm ET. Learn one of the key elements as to how to make your online securities offering a success. Building you community in advance of a securities crowdfunding round.