Early critics of equity crowdfunding, who quite often appeared to be part of the “financial establishment” with their own interests to protect, were happy to point out the unknown, but usually, long time scales that investors in startups had to wait to enjoy a return. Buying equity in a privately-owned business through crowdfunding was a risky and an illiquid investment. No matter how circumstances changed for any individual investor, their money was going to remain off-limits until the business they invested in exited by completing either a trade sale or an IPO.
The two UK market leaders, Crowdcube and Seedrs, began trading in 2011 and 2012 respectively. It’s true there were few early exits. Eventually, Seedrs responded in 2017 by being the first equity crowdfunding platform to launch a secondary market. Shareholders could inform Seedrs about the amount of shares they wanted to offload in any business. They were made available only to investors in the Seedrs network who already owned some in the same business. This was intended to ensure those secondary buyers had already had a chance to conduct their own due diligence in the business they were going to buy more shares in. It was not a live marketplace, and Seedrs set a “market value” price that buyers and sellers could either agree with or decide to not go through with a trade. It wasn’t a very dynamic marketplace, though at least it was a start.
Now that we’re another five years on, let’s look at what the secondary marketplace is like today. They have developed for two main reasons:
- Improved liquidity makes investing in startups through equity crowdfunding platforms more appealing.
- To make secondary buying and selling a larger income stream for the platforms.
UK secondary markets for shares bought through crowdfunding
Crowdcube has partnered with the data platform Crunchbase, and its Cubex secondary market provides easy access to data on more than 250,000 privately-owned companies throughout Europe. This gives investors and shareholders an opportunity to discover and research potential investments and then express an interest to buy or sell shares in private European companies of their choice. If enough interest is registered in a given business, Crowdcube will investigate a possible transaction and notify interested parties when a sale goes live. Cubex is currently operating as a Beta version.
In 2021, 1,063 shareholders in Freetrade sold £5.8m of shares through Cubex. This secondary share sale saw early investors enjoy a 47x (4,670%) return on investment without having to wait for a company exit – they were able to create their own one. Six first-round shareholders became millionaires when the company valuation skyrocketed to reach £265m. This would have required a minimum investment of £21,413 (which would have qualified for a 30% EIS tax benefit available to UK taxpayers).
Over at Seedrs, in the six months to September 2020, their secondary market had been averaging £500,000 of transactions per month. This had included some Revolut shareholders who sold over £1.5m of shares in the fintech firm at an average 598% profit. From September 2020, Seedrs broadened the scope of their secondary market beyond registered investors and businesses that had previously traded through the platform. They opened their secondary market to all private businesses, allowing founders, investors and early employees who had received equity to monetise their shares without having to wait for an IPO, trade sale or other exit event.
Seedrs made this move in partnership with Capdesk, a trading platform for anyone with equity in a private company. In a mutually beneficial collaboration, any business listed on Capdesk can sell shares via Seedrs’ marketplace, and anyone in Seedrs’ investor network can consider investing in many thousands more companies than have been featured on the Seedrs platform. Capdesk’s founder, Christian Gabriel, had previously worked at the FundedByMe equity crowdfunding platform in Denmark. It gave him first-hand knowledge of everyday investor and startup finance pinch points that Capdesk then set out to resolve.
The market is open for one week each month, starting on the first Tuesday of every month at 11 a.m. and ending on the following Tuesday at 11 a.m. Investors can only request to buy shares while the market is open, though investors can request to sell shares at any time. The total value of each trade must be at least £/€10 and no more than £/€25,000. Both the buyer and seller are charged 1.5%.
Outside of secondary markets made available by crowdfunding platforms, Funderbeam is a London-based international share trading platform for equity in privately-owned companies. Companies can raise funds through the platform outside of a structured crowdfunding project. The minimum investment in any company that is fundraising is typically set at between €250 and €1,000. Buyers and sellers in the secondary market can post orders of flexible quantities and values.
Funderbeam charges a 0.5% fee on all trades to the Seller. Buying investments through their marketplace does not incur a fee charged by the platform, though Funderbeam adds 0.5% to the buyers’ bills to pay Stamp Duty Reserve Tax (SDRT). This applies to any company trading shares registered in the UK. When this additional charge is collected by Funderbeam it is then paid on the buyers’ behalf to HM Revenue and Customs.
Investor SEIS/EIS tax benefits
Investors who have claimed tax benefits against the value of any investments made under the SEIS or EIS schemes should remember that they only avoid having to pay Capital Gains Tax on their returns if they have held the shares in question for at least three years. Shareholders selling their equity within three years are also liable to repay any tax relief already claimed. Initial SEIS and EIS benefits are not carried through to subsequent buyers.
Secondary markets outside Europe
Central financial authorities in several countries, including India which has the world’s third largest startup ecosystem, still do not authorise equity crowdfunding. News of secondary market developments is generally restricted to vetoes or approvals to test. Here’s a brief snapshot.
The Monetary Authority of Singapore (MAS), as an example, does not allow secondary markets to trade shares in privately owned businesses, which includes those acquired through crowdfunding. They therefore carry a higher liquidity risk.
In Brazil, the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliárioshas, or CVM) has launched a regulatory sandbox to test and implement secondary market regulations, with four platforms taking part.
In March 2022, the Securities Commission Malaysia gave equity crowdfunding platform pitchIN “in-principle approval” for a secondary market. In December 2022, nine months later, we could not see any mention of it on pitchIN’s site.
A blockchain future
The Swiss fintech platform Arcton, founded in 2022, aims to empower startups to easily raise capital by issuing regulated digital assets on the blockchain. Its legal framework is based on the Adaptation of Federal Law to Developments in Distributed Ledger Technology (the Swiss DLT bill). The DLT bill creates, for the first time, a secure legal basis for the issuance and trading of securities via a distributed ledger in Switzerland. There is currently no other country with an equivalent legal standing towards digital assets.
Investors receive an ERC-20 compatible token (the implemented standard for fungible tokens created using the Ethereum blockchain) that is backed by equity in a startup. Arcton’s legal structure allows the platform to tokenise any startup from around the world. Legal and security reasons bar investors from the US, China, Japan and Australia taking part, plus citizens from sanctioned countries.
At the beginning of 2023, Arcton will launch its first public market for startup shares with a cohort of five customers.
How long will it be before we see share certificates minted as NFTs? This would allow smart contract payments to the issuers whenever ownership is transferred to someone else.
A new opportunity for UK-based investors
The CrowdInvest platform, headquartered in London, is a cross-border startup investment platform with a mission to connect investors from developed markets with startups from growth markets. The objective is to catalyse businesses concerned with environmental or social impact outcomes.
The initial spotlight will be on the UK-India corridor and then expand to include emerging economies in southeast Asia, Africa and the Middle East. We will pay particular attention to nurturing founders from less privileged backgrounds to generate inclusive, sustainable economic growth. Our transparent application process and due diligence procedures have no gender bias.
You can join the CrowdInvest waitlist today at https://www.crowdinvest.com/ to stay up to date with developments on how to be involved.