Equity crowdfunding’s race for liquidity in the U.S. and U.K.

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By Vanessa Malone

Crowdfunded securities fall under the alternative investment category which typically get flagged as illiquid investments. While this may have been okay at the start, the private capital markets are evolving. Companies are staying private longer and peer to peer capital formation has seen a large uptick.

U.S. based equity crowdfunding platform, Wefunder, recently reported its best three months in the company’s four-year history, with investor volume up 35% February through April. In early May, the site also recorded $2 million of investments in a single day, a new record.¹ U.K. based investment crowdfunding platform, Seedrs, similarly reported that they’ve seen meaningfully higher levels of fundraising and investment activity than the same time last year.²

As the private capital markets continue to thrive in the U.S. and U.K., industry participants are racing to provide the logical next step in the capital raising cycle, liquidity through secondary trading.

Equity crowdfunding in the U.S.

In the U.S., there are a few secondary markets for private securities but none that cater to the equity crowdfunding market. Several broker dealers have applied or have acquired the necessary Alternative Trading System (ATS) license but none have launched their secondary trading venues. Things do seem to be heating up as favorable regulation continues to support growth in the private securities market.

Earlier this year the SEC proposed amendments to popular capital raising vehicles Reg A+, Reg D, & Reg CF. Just last week the SEC updated the “accredited investor” definition which opened discussions surrounding investment eligibility based on education rather than net-worth.

In the SEC’s report detailing the accredited investor definition amendment, they state that “the high-growth stage for many issuers occurs while they remain private.”³ $2.7 trillion was raised through exempt securities offerings in 2019.⁴ While the majority was raised through accredited investors, $2.4 billion has been raised through Reg A+ and Reg CF offerings which allow the everyday person to invest.⁵

All of this represents potential locked liquidity. With companies staying private longer, investors deserve opportunities to profit from their early-stage investments.

Equity crowdfunding in the U.K.

While the U.S. is on the starting blocks when it comes to secondary trading for equity crowdfunded securities, the U.K. has fired the starting gun with the U.K.’s two largest equity crowdfunding platforms in the lead.

Seedrs launched their secondary market back in 2017 but has seen the most demand since inception in June 2020. In their Secondary Market Update they reported the “strongest ever sell-side demand with over £5.8 million worth of shares submitted for sale and £4.6 million listed.⁶ A lot of the credit goes to trading securities for one of the first equity crowdfunding unicorns, Revolut. Nevertheless, the platform reported an average of £500,000 per month in secondary trades over the past 6 months.⁷ To expand on this growth, Seedrs just this week announced the expansion of their secondary market to include all private businesses.

Seedrs biggest competitor appears to want a slice of the secondary trading action. Earlier this month, Crowdcube announced their own secondary trading platform called Direct Community Offers.

It’s said that competition breeds excellence. We think it’s a very positive sign that demand for liquidity in the private markets is here and starting to be addressed.

In conclusion

Liquidity in the private capital markets has always been a hurdle for the crowdfunded securities sector. We’re headed towards the next evolution of equity crowdfunding, but we believe we’re only at the start of the race.

In the U.S., no liquid secondary market exists for crowdfunded securities. In the U.K. the largest secondary market for crowdfunded securities is open one week of each month and doesn’t offer real-time trading.

For the market to continue to grow and thrive, we believe the winning secondary trading venues will be the ones that match the pace for today’s investor.

About Horizon:

Horizon offers a suite of integrated securities software applications for compliant issuance through secondary trading of electronic securities. Truly a compliance-first business, our solutions combine Wall Street and Silicon Valley to power the next generation of exchanges and securities offerings in the U.S. and globally. Visit us at https://www.horizonfintex.com.

Sources:

¹WeFunder Quote

² Seedrs Quote

³,⁴,⁵ SEC Accreditation Report

⁶,⁷Seedrs blog

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Horizon offers a suite of integrated securities software applications for compliant issuance through secondary trading of electronic securities.

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