Seedrs Blog

Reducing the risk of asymmetric information on the Secondary Market 2 of 4

Reducing the risk of asymmetric information on the Secondary Market 2 of 4

30th May 2017 by Thomas Davies

For the beta launch of the Seedrs Secondary Market, only those investors who are already a shareholder in a company will be able to purchase shares in that company on the Secondary Market.  

Why we’ve taken this approach

Asymmetric information is one of the biggest challenges of any secondary market in private shares: the seller has a lot more information than the buyer. Unlike the public markets where the listing rules of the relevant exchange ensure that both buyers and sellers receive the same information instantly, in the private investment world it just doesn’t work like that.

Every business that raises funds on Seedrs has a dedicated post investment page with a discussion forum where teams share updates about the business and investors discuss various issues. A prospective buyer of the company’s shares does not have access to this information. And Seedrs can’t easily provide these buyers with access to this information because to do so would mean that the contents of the discussions are deemed a financial promotion. We would need to have the company verify every single bit of information ever disclosed in those discussions before the shares could list on the market. This would take up an enormous amount of time and resources for everyone involved, with cost implications for the buyer, seller and company.

We have always taken the protection of our investors very seriously, and we want to ensure that the buyers of any shares on the Secondary Market are given the same standard of care. That is why, for the beta launch, only those current shareholders in the business who all have access to the same information can buy shares.

While this is a difficult problem to overcome, we do believe it is solvable and we are working on a number of potential ideas. But we do not think that it is in the interests of anyone to rush this without getting the feedback from our customers, and ensuring that any solution that we come up with works for them. And for now, we are seeing heavy demand from shareholders to buy and sell shares from each other, and the Secondary Market will allow this to happen in a very efficient way.

What if you are interested in investing in a business that you are not currently a shareholder in?

If an investor is not currently a shareholder in a company, they can register their interest in the relevant share lot on the Secondary Market but they won’t be able to buy it yet. We understand how important it is that any investor can purchase shares on the market, and we will be looking at ways to open up the market to all investors in the near future.

Next we’ll cover:

  • What is a fair market price and why is there no bidding yet?
  • Why does the Seedrs nominee structure make it easy for the market to work?

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.

Thomas Davies

Thomas Davies

I'm the Chief Investment Officer for Seedrs.

Digital Agency Kent