The equity crowdfunding movement is gaining steam. The Regulation Crowdfunding Law essentially removed barriers to equity investment. Prior to the regulation, any third party that raised funds could only do so from accredited investors who earned $200K-$300K in household income or a house that is worth over $1M USD. Equity crowdfunding portals essentially mirror the function of an IPO and/or solicitation of a debt security.
But many have been wondering about secondary markets. Secondary markets are the exchanges we use to trade securities. Secondary markets provide an important governance structure to securities as all material changes to the company are publicized so that investors can trade accordingly.
The concern about removing regulations about trading securities on the secondary market relates to the expense associated with publicizing material changes to the firm. Smaller firms or startups simply don’t have the resources to publicize this information. Assigning any regulation to require these firms to do so is simply not realistic.
In any case, here is a helpful list of primary and secondary equity crowdfunding portals:
WeFunder boasts over $55 million in investment. The minimum is $100 and investors can participate in equity investing into small businesses, scalable tech startups, and real estate.
Fundrise focuses on real estate investment opportunities. The company boasts a 8.7-12.4% historical annual return. Fundrise will diversify one investment across a broad range of real estate deals.
Start Engine currently has 98 investment opportunities available on their platform. They also help companies launch an ICO. Start Engine allows companies to set a minimum and maximum to their goals.
Manhattan Street Capital sets a share price for each equity opportunity. A company will sell shares in tiers. At each tier the share price increases. I’ve noticed a lot of medical related devices and drugs listed so far.
Honeycomb Credit specialized in debt capital for main street entrepreneurs and small businesses. They curate the deals and have a high rate of success for the campaigns they’ve launched.
Seedrs: Seeders is testing a secondary market. The market opens for a fixed period. During that period, investors can request to buy or sell shares. Shares are sold at Fair Value, which according to Seedrs, is largely based on the firm’s past capability to raise capital.
Start Engine has a nascent secondary market with a handful of companies listed.
Secondary Markets and Regulation
We are still years away from an infrastructure that allows traders to view an accurate secondary price of equity crowdfunding shares. However, there is real promise that once the market has that information, significantly more capital will flow into small businesses, startups, and real estate markets that typically don’t see the lion’s share of investment.
Trading on the secondary market could also provide a much needed governance mechanism for non-public companies. Much documentation exists as to how poorly many small businesses are governed. Northeast manufacturing is a shining example of this malaise as many small to medium sized companies fail to compete in global markets.
In many cases the culprit is hereditary owners. In other cases the long-time owner/operator cannot find the appropriate succession plan that transitions responsibilities and leverages capital to expand under a young, aggressive operator.
Another reason for the small business malaise is that in many cases becoming more efficient through technology requires working capital or R&D investment. Small companies aren’t competing and oftentimes can’t afford technology solutions that can increase productivity.
The promise of equity crowdfunding is that markets can provide capital to solve these types of inefficiencies associated with small and startup businesses.