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SeedBlink’s Secondary Market is among the first bulletin boards implemented in Europe as per the new European Crowdfunding Service Provider regulation.
Through a secondary market, existing investors can exchange their assets and increase the liquidity of their portfolio investments.
Pitchbook shared that startups stay private longer in the market, making founders and investors eager to transform their assets into cash.
Two pandemic years didn’t impact secondary markets in a significant way. There was a small decrease once COVID-19 started in 2020, but the second half of that year brought a stronger field for secondary markets. The new context brought a greater desire for more liquidities, so this is how the market faced a growing need for secondary transactions where people could trade their shares in exchange for money.
A secondary market is a marketplace where private investors buy and sell assets they already own and exist for a wide range of securities, including stocks, bonds, and other financial instruments.
These markets provide liquidity to investors who wish to sell their securities before they reach maturity or before the issuer makes a public offering. Additionally, they allow new investors to enter the market by purchasing existing securities, which can be less expensive than buying newly issued shares.
There are several types of secondary markets, including
As we advance through the article, we’ll focus exclusively on how secondary markets can benefit your private equity portfolios, especially startup investments.
A secondary market for startup investments refers to a marketplace where private equity investments are bought and sold by investors after the initial offering. In other words, it is a platform where investors can buy and sell their ownership stakes in private companies previously acquired through a primary market during a financing round conducted by the target company.
Startup equity investments are typically illiquid, meaning they cannot be easily bought or sold. The secondary market allows investors to exit their assets before the end of the holding period or acquire additional investments in private companies. Liquidity is not guaranteed through a secondary market.
The secondary market for startup investments can include a variety of buyers and sellers, including institutional investors, high-net-worth individuals, and family offices.
The secondary market is essential for buyers as it offers several advantages over traditional primary market investments.
Here are some key market roles for a secondary buyer:
The secondary market for private equity provides an important avenue for sellers to liquidate their holdings and realize returns on their investments.
Here are some of the key roles of a secondary market for sellers:
Are secondary markets good opportunities for founders and their startups?
Overall, the secondary market for startup investments provides several advantages for founders and startups, such as:
Compared to an IPO, selling shares in the secondary market can be less burdensome regarding regulatory compliance, saving time and money.
These factors make it attractive for founders and startups looking to access capital and grow their businesses.
1. What is a bulletin board?
Bulletin boards allow secondary investors to post details about the investments they want to buy or sell, including the company's name, industry, investment size, and expected returns.
Similarly, potential buyers can post their investment criteria, indicating the types of companies or sectors they are interested in and the amount they are willing to invest.
The European Crowdfunding regulation regulates bulletin boards in Europe. So, whenever you are interested in acquiring or selling crowdfunding assets through a secondary market, look after platforms authorized by ECSPR (The European Securities and Markets Authority).
2. How does a secondary market event take place?
The process for a secondary market event can vary depending on the size and complexity of the transaction, but here is a general overview of the steps involved:
The timeline of a secondary market event can vary depending on the complexity of the transaction and the level of due diligence required. Smaller and simpler transactions may take a few weeks, while more extensive and more complex transactions can take several months.
3. Importance of liquidity for your investment strategy.
Liquidity is critical when constructing an investment portfolio, as it impacts an investor's ability to manage their investments effectively. Sufficient liquidity in an investment portfolio is essential to meet short-term cash flow needs or exploit potential investment opportunities.
Additionally, liquidity helps diversify an investment portfolio, offering private equity investors an allocation of funds across different asset classes, sectors, and geographies.
4. Liquidity is not guaranteed in the secondary market.
While the secondary market for startup investments offers greater liquidity than the primary market, it is still less liquid than public markets. This is because this type of market is decentralized and fragmented, which means there is no centralized exchange for these transactions.
As a result, liquidity in the secondary market for startup investments is not guaranteed. The availability of buyers and sellers can vary depending on market conditions, and there may be limited demand for a particular investment at a given time. This can make it difficult for investors to sell their holdings promptly, particularly if they need to raise cash quickly.
5. Secondary markets are safe & secure.
Security is a critical aspect of any financial transaction, and secondary market transactions are no exception. To ensure the security of these transactions, they are often conducted through a network of regulated intermediaries who provide custody services and help facilitate the transaction.
Confidentiality is another key consideration in secondary market transactions. Investors are typically required to sign non-disclosure agreements to ensure that sensitive information about the asset management, such as financial information or business plans, is kept confidential.
Additionally, the parties involved in the transaction, such as the buyer and seller, must provide proof of identity and undergo background checks to ensure that they are legitimate counterparties and minimize the risk of fraud.
6. Price per share before and after a secondary sale.
The price per share of startup assets can change before and after a secondary market transaction depending on various factors such as market conditions, the performance of the underlying assets, and the level of demand from buyers.
Also, the seller can use an indicative price given by the last financing round when making an offer. Indicative prices in the secondary market refer to the nominal value of a share (the last commercial value established in the previous equity fundraising event). In contrast, the asking price is arbitrary. This can be lower, equal, or higher than the indicative price and represents the starting point of the negotiation process.
7. Startup investments are still risky.
The success of a secondary market event and its transaction volume also depends on the company’s performance.
This is because the value of a startup investment is primarily based on the company's future potential, which is influenced by factors such as market conditions, competition, and management decisions.
For example, suppose a startup is performing well and meeting its growth targets. In that case, the value of its equity may increase, making it more attractive to potential buyers in the secondary market. Conversely, if a startup is experiencing financial difficulties or fails to meet its growth targets, the value of its equity may decrease, making it more difficult to find buyers in the secondary market.
8. Less hustle with paperwork.
Secondary market transactions typically involve just some legal documents or paperwork. The transaction platform usually handles this.
However, when in doubt, buyers and sellers need to seek the advice of legal and financial professionals to ensure that all necessary paperwork and legal documents are in order and that the transaction complies with all applicable laws and regulations.
The primary and secondary markets are essential to the private equity market.
The primary market refers to investing directly from the issuer, typically a company, a private equity fund, or a fund of funds. This involves investing in the company or fund in exchange for equity or ownership stake, expecting a return on the investment over a specific time.
Conversely, the secondary market refers to buying and selling existing private startup investments between investors.
As a startup founder, when addressing investors for a possible funding round, you offer a package of assets from your company. These assets have multiple forms depending on investors' needs, whether debt-based or in the form of equity and bonds issued as stocks or shares.
If transactions happen between startups and investors in primary markets, in the secondary market, the exchange of assets occurs only between investors. In a case of a secondary market event between investors, part of a venture capital fund, general partners, and limited partners can play different roles.
Asset owners trading their assets in the secondary market are the only ones gaining profits from the transaction. The company doesn’t receive anything in return.
SeedBlink Crowd SA is registered in the Register of the Romanian Financial Supervisory Authority (ASF), under number PJR28FSFPR/400001, as of 03.11.2022 with an EU passport as per European Securities and Market Authority (ESMA) register of crowdfunding services providers.
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