SeedInvest recently announced FINRA approval to launch a secondary market for trading. As we have written about, secondary markets can transform small business finance, equity crowdfunding, and regional economies.
Secondary markets can unlock significant value in small businesses by providing liquidity to investors, owners, and operators. Owner-operated firms can better understand the real valuation of their firm including the goodwill generated from their sweat equity.
The benefits of secondary markets are clear. However, successfully operating secondary markets for small business will require innovative platforms and ancillary support businesses.
Governance and Secondary Trading
Currently, in equity crowdfunding markets, there is not a clear path to the Governance of crowd shares. Most shares are non-voting class. Governance often occurs when an institutional investor co-invests with the crowd.
Small firms may not have enough discretionary resources to hire an executive team such as a CEO or CFO who shareholders could vote on to determine how the firm is managed. Traditional mechanisms of corporate governance might be less available.
How Will Small Business Determine Share Sales?
A second consideration is how often new shares of a firm will be traded. A driver of trading in publicly traded firms is often associated with new information released about the firm such as a press release, earnings report, or interview conducted by the executive team.
Analysts and traders will conduct a valuation of the firm before deciding to trade shares.
Secondary markets will need a process to manage this information flow for small businesses. As an intermediary, platforms must help small firms understand how much trading is appropriate based on share volume.
Now is an exciting time for new capital markets, especially as they relate to small businesses. Despite the challenges in creating a stock market for small business, the future of open capital markets are on the rise.
At the end of the day, the price of shares can be right-sized to the company no matter how many employees or revenue the firm makes.