We’ve announced today that Seedrs is preparing to launch a secondary market, and it’s due to be live by this summer.

The market, which will form part of the Seedrs platform, will enable investors who have shares held under the Seedrs nominee to buy and sell shares from and to each other. Meanwhile, investors in Seedrs-funded companies will have the opportunity to increase their stakes by buying shares from those sellers.

I’ve written this to explain why I’m excited to be launching the Seedrs Secondary Market, how it will work and how it will benefit the Seedrs community. You can see additional information about it here.

Why launch a secondary market?

“When are you going to launch a secondary market?” is probably the question I’ve been asked more than any other since founding Seedrs.

It’s a good question and one which we’ve been working on for some time. Our core model, which allows businesses to raise new capital from investors, and investors to subscribe for newly-issued shares in those businesses, is a classic primary market. So facilitating trading in those shares through a secondary market is a natural next step.

At the same time, running a secondary market for private company shares is far from trivial. It requires a critical mass of companies and investors, and it also takes a lot of thought to ensure that the right structures are in place so that the market functions well for everyone. I can tell you a huge amount of thought, debate and argument went into solving the many challenges that such a model needs to address.

As we’ve grown over the years, we’ve invested a lot of time addressing these issues. With nearly 500 deals funded and hundreds of thousands of users, we now have the scale that makes a secondary market worthwhile. And, with so many people to provide feedback, it’s enabled us to design a product that serves the needs of the entire Seedrs Community.

But most importantly, we listened to our users. Over the past few months, we’ve seen an increase in the number of investors offering to buy and sell shares on a secondary basis through the discussion forums on our post-investment pages. That showed us that there is clearly a demand for secondary trading. It’s also clear that trading shares via a discussion board is clunky and inefficient. So we decided we would look to meet the demand by creating a proper secondary market product that is simple and easy to use.

How it will work

Beginning on the first Tuesday of every month, the market will be open for one week. During this time, investors will be able to buy and sell shares from each other.

The trades will take place “under the nominee”. This means that our nominee company will continue to be the legal shareholder of the shares, but instead of holding them on behalf of the seller, the nominee will now hold them on behalf of the buyer.

During the beta phase:

  • Shares will trade at “fair value”, which is the price that Seedrs marks them pursuant to our Valuation Policy.
  • Only current investors in a given company will have the opportunity to buy shares in it.
  • Some companies will be ineligible for trading at certain times. This will generally be the case where the company is in the process of a major corporate transaction, or when other extraordinary circumstances are in place.

We will enhance the features on how the market will work over time which may include expanding the timing (longer windows or continuous trading), pricing (negotiated or bid/offered prices) and/or eligibility (new investors, when companies are ineligible) in the future.

Benefits for everyone

The Seedrs Secondary Market will benefit buyers, sellers and companies alike.

Until now, the shares investors purchase have been very difficult to trade, meaning that they need to wait for an exit event such as an IPO or a sale of the business. Whilst Seedrs has already seen portfolio companies like Chapel Down and FreeAgent achieve success on the public markets, allowing those investors to sell their shares and realise a profit, the long-term nature of this asset class means the vast majority remain illiquid for some time.

A secondary market has the potential to change that, giving investors the prospect of early returns. Meanwhile, investors who may want to increase their stake in a business will now have the opportunity to do so.

But the Seedrs Secondary Market is not just about investors: it has substantial advantages for companies as well.

Those companies that have already raised capital through Seedrs will find themselves under less pressure to deliver an early (and possibly premature) exit for their investors, as the Seedrs Secondary Market will provide those investors with another possible route to liquidity.

Meanwhile, companies who are considering raising money through Seedrs will benefit from an expected increase in available capital, as more investors are attracted to this asset class due to the prospect of secondary trading.

Final thoughts

I’m very excited about the forthcoming launch of the Seedrs Secondary Market, and I would make three final observations about it:

  1. This is a beta. We’ve worked hard to design the Secondary Market in the most logical way possible, starting with a simple product that addresses the feedback we’ve received thus far. I’m confident that we’ve built something great, but I have no doubt that there is still plenty of room for improvement. Over time we’ll continue to evolve the product as we learn more and more about how it is functioning.
  2. As in any market, the ability to buy or sell will depend on there being sufficient supply or demand. Even if the market works as well as we hope, investors will not always be able to buy or sell shares when they want to. So, even when the Seedrs Secondary Market becomes available, we strongly advise investors to expect that they’ll need to hold their shares through to the business’s exit, and to view any sale (or purchase) on a secondary basis as a “plus” rather than a certainty.
  3. The Seedrs Secondary Market is one of many examples of how our nominee structure benefits our investors. Because we hold shares in each business as nominee, we’re able to take care of the whole transaction process from end-to-end, without the company whose shares are being traded needing to get involved with time-consuming administrative matters. Without such a nominee, the mechanics of trading shares would be substantially more complicated.

Please note that investing involves risks, including loss of capital, liquidity, lack of dividends and dilution, and should be done only as part of a diversified portfolio. Not all shares will be eligible for the Secondary Market and, even if they are, the ability to buy and sell shares will depend on demand. Investors should not assume that an early exit will be available just because a secondary market exists.