September 26th, 2018
Will Equity Crowdfunding Buyers Be Able to Sell Their Shares?
Now that non-accredited investors can buy shares in private companies through equity crowdfunding platforms, many people eager to get in on the ground floor of high flying startups are considering making those investments. Before they cut a check, would-be investors should consider how they will get their money back out. It won’t be nearly as easy as putting it in.
Traditionally, the business angels and venture capitalists who invest in startup companies have achieved liquidity when the companies in which they invested were acquired or went public. Unfortunately, for non-accredited equity crowdfunders, there won’t be enough initial public offerings or acquisitions to provide all of the needed liquidity. Crowdfunding isn’t likely to boost the number of acquisitions or IPOs much in the short run. While more companies will receive investment, a similar number will exit.
Moreover, many of the companies that will seek investments from non-accredited investors won’t be the types that typically go public or get acquired. For investors in companies whose business models aren’t appropriate for an IPO or an acquisition, traditional methods of achieving liquidity will remain unavailable.
In their new book, Equity Crowdfunding for Investors: A Guide to the Risks, Returns, Regulations, Funding Portals, Due Diligence, and Deal Terms, crowdfunding experts David Freedman and Matthew Nutting suggest that strategic and institutional investors might become buyers of the crowdfunders’ shares. But, as these authors rightly point out, these investors are unlikely to provide much of a market. Strategic and institutional investors finance a small minority of businesses that were previously backed by business angels and entrepreneurs’ friends and family. Because strategic and institutional investors’ decisions are driven by the characteristics of the companies seeking funding and not the characteristics of the earlier investors, equity crowdfunding is unlikely to change the number of institutional and strategic investors buying shares in private companies.
Freedman and Nutting suggest that other non-accredited investors who were previously unaware of the investment opportunities, or who were limited by capital or regulations from making investments earlier might buy the crowdfunders’ shares. However, as the authors explain, that is unlikely to happen until the startups themselves are no longer seeking investment through crowdfunding. As long the companies are still raising money, new investors might find it easier and cheaper to buy shares from the companies themselves rather than from earlier investors.
The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support and networking opportunities to over 1100+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more About Us or visit ncfacanada.org.