PeerRealty, a real estate crowdfunding platform, recently introduced CFX, the U.S.’s first secondary market for equity crowdfunding shares. For accredited investors, this exchange will improve the liquidity of equity crowdfunding investments.
Unfortunately, only accredited investors can use the platform. Equity crowdfunding investments made by non-accredited investors remain as liquid as ice.
This lack of liquidity creates a big problem. With the implementation of the rules for Title IV of the Jumpstart Our Business Startups (JOBS) Act in June, non-accredited investors — people with less than $1 million in net worth or $200,000 in annual income if single and $300,000 if married — can now buy shares in private companies through equity crowdfunding portals.
But non-accredited investors can’t sell those same shares. Unlike accredited investors who can go to PeerRealty to sell their securities, unaccredited investors have to wait for the companies in which they have invested to go public or get acquired to cash out. And if venture capital and angel group investments are any guide to the time to exit for young companies, then these unaccredited investors will be waiting five to ten years for liquidity. Of course, that’s if the companies in which they have invested are the kind that will be purchased or go public.
Securities and Exchange Commissioner (SEC) Daniel Gallagher has recognized this problem, calling for a solution to the ill-liquidity of crowdfunding securities in a September 17, 2014, speech.
Specifically, he said, “I’ve called for the creation of ‘Venture Exchanges’: national exchanges, with trading and listing rules tailored for smaller companies, including those engaging in issuances under Regulation A.”
Congressman Scott Garrett, the New Jersey Republican who chairs the Subcommittee on Capital Markets and Government-Sponsored Enterprises of the House has taken the issue to Capitol Hill. He has put forth a discussion draft of the Main Street Growth Act (PDF) – a bill that would “amend the Securities Exchange Act of 1934 to allow for the creation of venture exchanges to promote liquidity of venture securities, and for other purposes.”
Not everyone agrees that the venture exchange concept is the right solution to the liquidity problem of non-accredited investors who buy shares in private companies through equity crowdfunding. The approaches being discussed most in Congressional hearings, and with the SEC, seem more like small cap stock exchanges than portals for making “pre-owned” equity crowdfunding shares available to other non-accredited investors – an approach some think is more fitting.
However, I commend Commissioner Gallagher, Congressman Garrett and others for recognizing that the federal government needs to do something. Allowing non-accredited investors to buy shares in private companies through equity crowdfunding platforms, as the JOBS Act has made possible, is only half the battle. Finding a way for those investors to sell their shares is equally important.
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