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How Crowdfunding Software Facilitates Secondary Trading

How Crowdfunding Software Facilitates Secondary Trading
How Crowdfunding Software Facilitates Secondary Trading

What does the secondary marketplace in equity crowdfunding platforms refer to?

A secondary marketplace in equity crowdfunding platforms allows investors to buy and sell their shares in startups or businesses after the initial funding round. This feature provides liquidity to investors, enabling them to exit their investments before the company goes public or is sold. By offering a secondary market, these platforms not only attract more investors, looking for potentially shorter investment horizons but also enhance the overall investment appeal by providing a clear path for capital realization. This marketplace operates under specific regulatory conditions to ensure transparency and fairness for all participants.

Top 5 leading equity crowdfunding platforms that offer secondary marketplaces for investors.

1. StartEngine: This platform is renowned for its comprehensive services in equity crowdfunding and also operates StartEngine Secondary, an SEC-regulated Alternative Trading System (ATS), providing a secondary market for trading securities originally issued on StartEngine.
2. SeedInvest: Known for its robust selection process and diverse investment opportunities, SeedInvest also offers a secondary market feature, allowing for the trading of securities. This platform is highly regulated, providing a secure environment for both accredited and non-accredited investors.
3. Republic: This platform Republic caters to a broad range of investors and is known for its innovative approach to equity crowdfunding. While they’ve been discussing and pursuing secondary market solutions, detailed current offerings on the status of these developments weren’t directly noted in the latest updates.
4. MicroVentures: MicroVentures provides a secondary market although it is noted for being relatively illiquid. This platform allows investors to trade shares in startups they previously invested in, albeit with certain limitations.

5. FundraisingScript: FundraisingScript is a crowdfunding platform development company that offers customizable crowdfunding software, including features for secondary markets. This platform supports various types of crowdfunding, including equity crowdfunding, real estate crowdfunding, donation crowdfunding and reward crowdfunding.

Understanding Secondary Marketplaces.

A secondary marketplace in equity crowdfunding platforms allows investors to buy and sell shares in private companies after the initial crowdfunding campaign has concluded. This marketplace operates much like a traditional stock exchange but is tailored for private investments, enhancing liquidity for shareholders who otherwise might have to hold their investments until the company is sold or goes public.

Here’s how it typically works: 

  1. Listing of Shares: After an initial crowdfunding round, shares of the company may be listed on the secondary marketplace in equity crowdfunding software, provided the platform supports such transactions. These shares are generally held by initial investors who now wish to sell.
  1. Trading Platform: The crowdfunding platform may feature an online trading system where these shares can be bought and sold. This system is usually regulated and must comply with securities laws, KYC, and AML as it involves the transfer of ownership of private securities.
  1. Price Determination: Prices of shares in the secondary market can be determined by supply and demand, similar to a public stock exchange. Some platforms might facilitate bidding and asking prices, while others might use automated methods to set prices based on recent trades or external valuations.
  1. Transaction Completion: When a buyer agrees to purchase shares at the listed price, the platform facilitates the transfer of shares from seller to buyer. This process includes ensuring the legality of the transfer, securing payment, and updating the company’s cap table if necessary.
  1. Fees and Regulations: Platforms typically charge fees for transactions on the secondary market. Additionally, they must ensure compliance with financial regulations, which may include reporting trades and maintaining records.

This setup benefits investors by providing a potential exit strategy and enhances the attractiveness of equity crowdfunding by offering liquidity. It also helps new investors to participate in investment opportunities that were previously closed after the initial funding round.

Platforms like StartEngine and SeedInvest are examples where such secondary marketplaces are integrated, providing a more dynamic investment environment within the private sector.

Here is a technical guide to understanding how a secondary marketplace in a crowdfunding platform works.

Admin: Secondary market control

Purpose of this technical article: to inculcate the concept of the secondary market.

The secondary market in crowdfunding refers to the buying and selling of previously issued crowdfunding securities, such as equity, after the initial fundraising campaign has concluded. In traditional financial markets, secondary markets provide liquidity and a platform for investors to trade existing securities.

Enable/Disable secondary market – admin

This going to be handled dynamically as we are creating dynamic solutions, the secondary market is going to be handled by the admin portal.

Admin (platform owner) portal – Setting > General.

  • Enable Second market (Dropdown) – Enable/Disable (Active/Inactive).
    • This is going to impact on front side Home page “Secondary market”
    • Added Inside investment opportunities.
    • Visible inside the footer.
  • These project cards are slightly different and it contain the selling share number and price.
  • Campaign details should be same as it is with minor changes (The donation button is removed/changed).

Enable secondary market

The fees are going to be added in sections either here in “Setting > General” or in “Setting > Revenue Fees”

Dynamic terms: – Below two image options are added which prefer please do accordingly

  1. Seller success fees: this fee going to apply when the seller wants to sell shares more than the original share amount.

Check box added to remove the fees from the formula.

  1. Seller processing fees: this fee is applicable to the total selling value, the seller will get the amount after this fee’s deduction.
  2. Buyer processing fees: When buyers purchase securities, the admin fees are going to apply with gateway charges.
  3. Revert back shares to the Owner (Days): Shares reverted back to the original investor’s account.

This is also applicable to partial purchases. For example: Seller wants to share 10 shares, partial purchase is enabled.

  • If 5 shares are sold, the rest available 5 shares are reverted back if it is not sold in 90 days.
  1. Auto approve shares: All the processes bead, sell request to purchase do not go through any admin approval.
1.0. Admin-Enable Secondary market

1.0. Admin-Enable Secondary market

1.1. Option 2 Admin-Second market setting

1.1. Option 2 Admin-Second market setting

Two tabs are already there to access secondary market functionalities.

All the equity-based successful projects are falling into the secondary market.

Seller Request (Example wise flow) – Front-Seller

The button enables successful investments > “Sell Shares”

Sell shares > on click: redirect to sell process.

2.0. Investor Dashboard - Sell Share button

2.0. Investor Dashboard – Sell Share button

Seller request (Step 1) – Share details

Project name, image, original purchase price, and total available shares mentioned.

To sell shares “Expected shares unit price” and “number of shares” wanted to sell.

  • Not able to sell more than available shares.
3.0. Sell request Step 01

3.0. Sell request Step 01

In the above example, the original per-share price is $ 250 with a quantity of 100,

Wants to sell at $ 350 per share price, a total of 75 shares.

The predicted takeaway amount is mentioned.

Partial Purchase

  • On: Multiple buyers can buy from this sell request.
  • Of: Only one buyer can purchase from this sell request.

Predicted takeaway amount

  • Total amount = Expected Share unit price * number of shares
  • Processing fees = (Processing fee number) * of Total amount / 100
  • Success fees = (Success fees number) * Processing fees / 100
  • Real-time Gateway fees = % of gateway fee + flat fee (directly added by admin) % of gateway fee = (Gateway fee number) * Total amount / 100

Seller Request (Step 2) – Terms and agreement

As per the research, for sell request. The seller has to accept the terms and conditions. After, the seller will be able to share the sell request.

  • The company name is dynamic.
3.1. Sell request Step 02

3.1. Sell request Step 02

Seller request (Step 3) – Summary

This page contains a summary of the sell request. Reference ID helps the seller to make certain changes after request. Mentioned the original share price and requested share price.

Seller Dashboard – opens the page secondary market dashboard.

3.2. Sell request Step 03

3.2. Sell request Step 03

Secondary Market Dashboard

User dropdown contains “Secondary market” module > Open, two sub-tabs.

  • Seller Dashboard
  • Purchase Dashboard

The inside seller dashboard shows only sell requests/sold shares with multiple aspects.

3.3 Seller Dashboard first sell request

3.3 Seller Dashboard First sell request

The above example contains an overview of the sell request,

Under review: All new requests stated as “Under review” – Admin did not check this request yet.

Reference ID: Shows reference ID

View Details: led seller to check the sell request summary with predicted takeaway.

View details Page

The details are visible below.

3.3.1 Seller request view details

3.3.1 Seller request view details

Admin – Seller List (Example wise flow)

As an admin, all the seller actions and requests are performed through the Seller page.

This page contains a search bar (Seller & Project names accepted).

4.0 Admin first Seller request

4.0 Admin first Seller request

The latest sell requests added top of the list.

The table contains the below cells.

  • Reference No
  • Seller Name
  • Project Name
  • Date of Request – Original date of request.
  • Sell Price
  • Original Share Price
  • Processing Fees
  • Success Fees – (Visible if enabled or else shows 0)
  • Status – (Multiple statuses) Review pending, Review and updated
  • Published, Sold-out, Payout, etc.
  • Action – Edit Sell request, Approve, Reject etc.

Edit – Sell request (Admin)

The edit button led to a specific sell request. Here is all the information contained. Such as Project name, Seller name, original share price, available shares, date of request, requested shares, requested share price, partial purchase, and predictable takeaway information.

4.1 Admin first Seller request - Edit view

4.1 Admin first Seller request – Edit view

Admin can update Requested shares, Requested share price, and Partial purchase.

  • After each change need to click on the update button.
  • If any information is added by the admin it will notify to seller.

Edited – Sell request (Admin)

In this example, the admin edits “requested share price” to $ 300.

It impacts the total sum to the total takeaway amount.

4.2 Admin - Edited sell request

4.2 Admin – Edited sell request

Changes impact as mentioned above. This sell request has not been approved yet. Price update notifies the seller.

Seller checks edited sell request

Tag update: Review & Edit by admin.

What admin updated is mentioned there $ 300.00 (Edited). Add (Edited) when admin updates “Quantity”.

5.0 Seller - Check admin edited request

5.0 Seller – Check admin edited request

View detail page change as per the new updates.

5.1 Seller - Check admin edited request (Detail)

5.1 Seller – Check admin edited request (Detail)

Admin – approved sale

Seller getting notified by the system that your request is approved and published on the portal.

The sell request card is updated. Admin Seller list, status updated as “published”.

5.2 Seller - Check admin approve sell

5.2 Seller – Check admin approves sell

  • Publish date is added on the card with the notation.
    • If listed share/s are unsold till the maximum time limit, then it is restored back to your holdings.
    • Status: “Unsuccessful”.

Jump to buyer flow

Seller – Find secondary market sell requests.

Section only visible if one published request is open for sale.

6.0 Buyer - Home page secondary market

6.0 Buyer – Home page secondary market

In the above image, 2 online sell requests are mentioned. The first one is for partial purchase and another with no partial purchase.

Card labels:

  • Project Name
  • Seller Name
  • Address of project
  • Per share price
  • Total number of shares: If partial purchase is on, only left available share quantity is visible
    • g.: Requested quantity = 100, sold out = 50
    • The total available shares “50 shares” are visible on the card.
  • Project Detail: shows the original project detail page.

Buy shares: Led to buyer process.

6.1 Sell card close-up

6.1 Sell card close-up

Non-login users can check the secondary market sell requests, to purchase it login must needed.

Buyer – Buy share step 01

To purchase shares first page contains the sell request information which includes, the project name, price per share, Available shares to purchase, number of shares (enabled only in partial purchase), view and sign contract.

“Check upon the original project” – led to the project detail page.

  • How the gateway charges are applicable? Included or non-included please add accordingly.
7.0 Buyer - Purchase shares process step 01

7.0 Buyer – Purchase shares process step 01

Buyer Purchase Step 2 – Choose payment gateway & Pay

The buyer going to choose the payment gateway and make payment. After successful payment. The purchase receipt is getting generated.

7.1 Buyer - Purchase shares step 02 Payment

7.1 Buyer – Purchase shares Step 02 Payment

Successfully purchased receipt

The status is “payment successful and review”. The message was written after ”Share Purchased successfully”

  • Please review your request summary. Payment processed successfully. system will notify once the certificate is generated.
7.2 Buyer - Purchase successful summary

7.2 Buyer – Purchase successful summary

 

Share purchase listed in admin portal > Secondary market > buyer tab.

Purchase dashboard – Purchase history.

Investment in review tag: this tag is mentioned for purpose. Explanation mentioned in the next point.

View Details: led back to the above-mentioned image.

7.3 Buyer - Dashboard purchase card

7.3 Buyer – Dashboard purchase card

Admin – entry in transaction table (with refund)

The transaction table contains some new fields including “Invest type”.

Investor Type – Shows the purchase type which is normal investment or Secondary market investment.

Refund possible after purchase.

“Share certificate is not generated yet, because if the refund is possible there is no need to generate share certificate on time” To control refund, the admin needs to approve the sale. Mentioned in the upcoming images.

7.4 Admin - Transaction entry

7.4 Admin – Transaction entry

Admin buyer list details

The buyer list contains all the secondary market through purchased shares details. It depends on the bulk action too.

To lead the above-mentioned example. Buyer purchased shares it shows status = Purchased.

  • Another entry is listed in the “Transaction table”.
    • To avoid conflict where a share certificate is already generated but needs to refund that sell seems the system failed to work. Controlling this hurdle needs to approve this payment from the buyer’s side.
  • Conditions resolved by approved payment.
    • Remove the refund from the investment (Transaction table).
    • If the refund is closed, the admin can create and distribute the share certificate.
8.0 Buyer list buy share

8.0 Buyer list buy share

Approve sell

After clicking “approve sell” it opens the alert box (Confirmation), the information mentioned inside.

  • Once you approve this investment, the refund is disabled in the Transaction list.
  • After confirmation, you will be able to generate the share certificate.
8.0.1 Buyer list Approve purchase (Pop-up)

8.0.1 Buyer list Approve purchase (Pop-up)

Generate share certificate and distribute

After-sale approval, the Certificate generation button is enabled. On click > certificate getting generated.

Enables the Distribute button and will be able to distribute it.

8.0.2 Buyer list Enable certificate generate

8.0.2 Buyer list Enable certificate generate

8.0.3 Buyer list Enable certificate distribution-download

8.0.3 Buyer list Enable certificate distribution-download

Distributed successfully process closed.

After successful distribution admin can download it from this list and inside specific project’s share certificate list.

Certification distribution email share with Investors. Update purchase dashboard.

8.0.4 Buyer list Process successful

8.0.4 Buyer list Process successful

Purchase Dashboard – Share certificate updates.

Investors can download certificates through the 2nd market purchase dashboard.

Status changed Investment approved.

  • The investor will be able to download the certificate from the “Share Certificate” page.
9.0 Buyer dashboard - Download certificate

9.0 Buyer dashboard – Download certificate

Downloaded Certificate

The certificate contains the same information as the first purchase of equity. Only term is going to be added in the certificate footer.

“* This certificate is auto-generated. The Share Certificate is valid until the owner executes a sale through the secondary market or if the nominee exits the investment.”

Share certificate added inside project overview “share certificate” tab.

9.1 Buyer - Share certificate

9.1 Buyer – Share certificate

Admin transaction table (refund disabled)

After sell approval refund is cancelled and the transaction table removes the “refund” button.

9.1.1 Admin - Transaction (no refund)

9.1.1 Admin – Transaction (no refund)

Admin – Project overview “Secondary Investors”

Admin should be able to check the secondary purchase entries specifically to avoid conflicts.

For example, Buyer 01 purchased 75 shares, a price of 300.

Buyer 02 purchased 50 shares, a price of 275. Gateway fee shows there.

For a track, this tab shows the “total approved shares” and “total sold shares”. (Where these records come from is mentioned in the upcoming images.)

10.0 Admin - project overview 'second sale'

10.0 Admin – project overview ‘second sale’

Admin – Project overview “Regular Investor”

If we look into “investor” it shows the additional field added “Sold shares”. This shows information between purchased shares and sold shares records. The total of sold shares is the total of “Sell approved”.

Seller 01 (a sell-out of some purchased shares) sold 75 shares and buyer 01 purchased.

Investor 01 (sell out all the purchased shares) sold 50 shares and buyer 02 purchased.

10.01 Admin - project overview 'regular sale'

10.01 Admin – project overview ‘regular sale’

Admin – Share Certificate (update)

These operations impact first-time buyer’s certificates. The buyer who sold out all the purchased shares is in terms of updating or getting cancelled their certificates.

For better term understanding add the below image for example.

Inv first – not selling any shares.

Seller 01 – sold 75 shares from 100. (The previous certificate was already generated)

Investor 01 – sold 50 shares from 50. (The previous certificate was already generated)

Buyer 01 – purchased 75 shares. (Certificate generated at time sell approve)

Buyer 02 – purchased 50 shares. (Certificate generated at time sell approve)

On click > Update certificates. The sold certificate status is changed. (mentioned in another image)

11.0 Admin - Certificate generation

11.0 Admin – Certificate generation

Admin – Share Certificate (Updated)

After clicking “Update Certificate” sold certification status is changed for clearer information.

It is clear now that, the share certificate getting updated with “Seller 01”.

Share certificate getting cancelled of “Investor 01”.

On click > “Sent cancelled & Updated share certificate notation” send an email to the “Seller 01” & “Investor 01”.

11.1 Admin - Certificate updates

11.1 Admin – Certificate updates

Secondary buyer – Investor Dashboard

After the successful purchase investor dashboard was updated for buyer 01.

Tag updated “Secondary market”.

12.0 Buyer 01 - Investor dashboard updates

12.0 Buyer 01 – Investor dashboard updates

Secondary buyer – Share certificate updates.

Share certificate – Listed successful sell along with download button.

12.1 Buyer 01 - Share certificate updates

12.1 Buyer 01 – Share certificate updates

In Conclusion

The secondary marketplace in equity crowdfunding platforms provides an essential feature by allowing investors to buy and sell shares after the initial funding round. This system not only enhances liquidity, enabling investors to exit their investments before a company’s public offering or sale, but it also attracts a broader range of investors by offering potentially shorter investment horizons. Such marketplaces operate under strict regulatory frameworks to ensure fairness and transparency, crucial for maintaining investor trust and ensuring the integrity of transactions.
Platforms like StartEngine, SeedInvest, and MicroVentures are notable examples where secondary marketplaces have been successfully integrated, offering investors dynamic and secure environments for trading securities. This integration significantly enhances the attractiveness of equity crowdfunding by providing a clear path for capital realization, which can help fuel the growth of startups by broadening their investor base. Overall, secondary marketplaces play a vital role in the evolution of equity crowdfunding, providing much-needed liquidity and making private investments more accessible and appealing.
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