StartEngine is a pioneer in the fast-growing equity crowdfunding industry. Founded in 2014, the company has helped to fund more than 375 companies and the total amount raised exceeds $200 million. But the company has been pushing the innovation of its platform to keep up the growth. The latest offering: StartEngine secondary.
Think of is an electronic stock exchange like the Nasdaq. That is, the StartEngine secondary allows investors to buy and sell their holdings in the stocks of startup companies. This is also known as an ATS or alternative trading system.
This platform is fairly unique in the equity crowdfunding industry. But it will be a game changer. After all, one of the biggest issues with investing in startups is the expense and difficulties of getting liquidity. Often investors will have little choice but to hold onto their stock holdings for a long period of time – until there is an acquisition or IPO. It is not uncommon for this to last more than 10 years. But for many investors, this is way too long.
Let’s face it, there is often a need to get more cash for an emergency or for a major change in life, such as the purchase of a new home.
How it Works
Building the StartEngine secondary system has not been easy, though. Part of this has been the technology. There are complexities in exchanging equity in startups, such as handling transfers and contracts.
Then there are the federal and state regulations. Although, an advantage for StartEngine is that it is a broker dealer licensed with the Securities and Exchange Commission (SEC) and FINRA (Financial Industry Regulatory Authority).
So, by doing all this, the StartEngine secondary system makes it possible for non-accredited investors to trade their securities. Keep in mind that the requirements for accreditation include:
- A person must have annual income more than $200,000 ($300,000 for joint filers) for the past two years and the expectation that the earnings will be the same or higher for the current year or
- A person has a net worth that is more than $1 million and this excludes the value of the principal residence.
Thus, the StartEngine secondary system will greatly expand the market. It will also go a long way to make it a durable asset class.
Yet there are some nuances, especially with the different types of securities for crowdfunding. For example, the shares of a Regulation A+ offering – which is for larger capital raises – can be traded freely after an initial purchase. But this is not the case with crowdfunding regulation offerings because there is a one-year lock-up.
Currently, the StartEngine secondary system will allow trading in its own shares. This is a smart move since it will help to test the system and learn where to make the improvements. Later, StartEngine will probably expand coverage for the startups it provides funding for. And perhaps there will be trading for companies from other crowdfunding platforms.
Bottom Line on StartEngine Secondary
While still early, there are encouraging signs for the StartEngine secondary system.
“The order books have been active and bid-ask spreads have been quite reasonable so far in terms of the private markets,” said Brian Belley, who is the founder of Crowdwise.org and VentureWallet. “Right now, the bid-ask spread is 40 cents on the $12 per share for StartEngine shares, so investors are looking at a liquidity premium of roughly 3% plus the seller fees of 4%. The buyers pay no fees. Obviously, seeing 5% to 10% fees for selling shares may sound quite high compared to public market equivalents, but for investors who really need to get their money out, it at least gives them an option to recuperate some of their cost, where this would not have been a possibility before.”
But over time, the costs should come down as the trading activity increases. And yes, there should be stronger growth in the crowdfunding industry.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is an advisor/board member for startups and author of various books and online courses about technology, including Artificial Intelligence Basics, The Robotic Process Automation Handbook and Learn Python Super Fast. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.