Seedrs, an equity crowdfunding platform in the U.K. which has provided £210 million ($273 million) to over 500 start-ups since its launch in 2012 including financial technology (fintech) firms such as WeSwap, is set to launch a secondary market pilot scheme for investors "in June", according to its chief investment officer, Thomas Davies.
The long-term nature of equity crowdfunding means that the emerging asset class, which has been extensively used by fintech (financial technology) firms and smaller scale businesses that have struggled to attract scarce bank finance, has historically been illiquid.
Funds are only released when a business is sold or goes to the stock market for the first time with an initial public offering (IPO). Investors have not had an exit strategy – until now – which has discouraged some primary investors that don't want their money locked away.
Speaking to CNBC prior to the announcement of its plans, Davies at Seedrs confirmed the beta launch will be in June, as the company is "still putting the finishing touches to the build-out."
"The full 'go live' will not happen until we've done at least four trading cycles," he said in a phone interview with CNBC. The pilot stage announced Monday will be used to fix any technical or procedural issues.
"We plan to hold a secondary market on the first Tuesday of every month, so realistically we are looking at October 2017 for the full launch," he added.
There are a number of initial restrictions and limitations, which may remain depending upon the feedback Seedrs gets during the imminent beta phase. Principal among these is that only existing investors will be able to buy a greater percentage in a firm, which is reliant upon others wanting to divest. Community members will, however, at last be able to participate outside of a normal fundraising campaign.
In addition, there will be a fixed "fair value" price, not an open trading environment with full volatility. The Seedrs valuation policy will apply. The crowdfunder says it adheres to international private equity and venture capital (IPEV) guidelines when setting prices for firms.
Some companies will be ineligible. For instance, if they are facing liquidation or an exceptional transaction is imminent that may cause big price swings and scope for manipulation.
"We may change some restrictions for the full 'go live'," explained Davies in reference to the ability for outsiders to register an interest to buy shares in any company on the beta platform. "If enough demand exists, we could expand the market further; increase the monthly frequency; pricing parameters; and openness to new investors. But we've very much in a learning phase at the moment."
Seedrs is regulated and authorized by the U.K. Financial Conduct Authority (FCA) so policing the market to some extent is required, although it is not proposing a fully open market in the traditional sense of a share trading platform. The extra regulation, capital and other requirements of that would be too onerous for a crowdfunding model that relies on the internet to attract investors – from the retail to the venture capital fields – to companies that pitch ideas on its platform. Stakes are parceled out on crowdfunding websites to try to reduce risk and diversify portfolios.
In a statement, Jeff Lynn, CEO and co-founder of Seedrs, said: "Secondary markets are challenging to operate successfully, and we are very conscious of our obligation. That is why we are launching this product in beta form initially, so that we can observe behavior and make improvements as we go."
In the same statement, Tim Levene, managing partner at one of Seedrs' core investors, Augmentum Capital, claimed the "announcement today (Monday) is a game changer for the equity crowdfunding space."
"In order for the industry to truly scale," he said, "a secondary market is essential. It will create a real opportunity to provide early investors with returns, and make this asset class more attractive to new investors." The theory is that more investors will be attracted if they know they can get their money out fast – provided there is a buyer.
The market for equity in private companies is never likely to be as liquid as for other sectors, such as the debt markets. "Historically, it's true this is an illiquid asset class," said Davies, during his CNBC interview. "But the introduction of a secondary market will slowly help to change this. I don't expect it to be the Nasdaq, but it will develop."
Seedrs' move is part of a wider global attempt to grow the crowdfunding arena and aid its evolution away from being a novelty and into a more traditional investment asset class. This is something being pursued in the U.S. and elsewhere around the world. It is not restricted to the U.K., but is thought to be unique to that market.
As the initial early boom years of crowdfunding recede it must seek new ways to continue its growth. In Seedrs case its imminent secondary market is in response to customer demand.
"We've seen on our discussion boards that people want to buy and sell shares. So far, they've been approaching this in an informal manner, but it's why we decided to act," said Davies, who confirmed that Seedrs nominee structure means all trade executions and procedures will be done in-house. It is not a public "lit" market in this regard with all the attendant complications that would bring.
Seedrs will take its customary 7.5 percent seller's fee for any trade that is profitable. This mirrors its primary market structure where no fees are levied against buyers or fees applied to unprofitable firms.
There are no launch customers because as Davies says, "it depends upon who lists themselves during the beta and subsequent live launch."