The securities of private companies are illiquid, meaning they’re hard to sell.
Since 2017 I’d guess a billion dollars and a million person-hours have been spent by those who believe blockchain technology will create liquidity for private securities. Joining that chorus, a recent post on LinkedIn first noted that trillions of dollars are locked up in private securities, then claimed that blockchain technology (specifically, the technology created by the company posting) could unlock all that value.
This is all wrong, in my always-humble opinion. All that money and all those person-hours are more or less wasted.
My crystal ball is no clearer than anyone else’s. But when I try to believe that blockchain will create active secondary markets I run up against two facts:
- Fact #1: Secondary markets for private securities have been perfectly legal in this country for a long time, yet there are very few of them.
- Fact #2: The New York Stock Exchange and other exchanges around the world were vibrant even when they were using little slips of paper.
Those two things tell me that it’s not the technology that creates an active secondary market and hence that blockchain won’t change much.
An active secondary market is created when there are lots of buyers and lots of sellers, especially buyers. When millions of people wanted to buy Polaroid in the 1960s they didn’t care whether Polaroid used pieces of paper or stone tablets. Conversely, put the stock of a pink sheet company on a blockchain and you won’t increase the volume.
As described more fully here, there are a bunch of reasons why there aren’t lots of potential buyers for a typical private company:
- It probably has a very limited business, possibly only one product or even one asset.
- It probably has limited access to capital.
- It probably lacks professional management.
- Investors probably have limited voting rights.
- There are probably no independent directors.
- Its business probably depends on one or two people who could die or start acting like Elon Musk.
- Insiders can probably do what they want, including paying themselves unlimited compensation.
- No stock exchange is imposing rules to protect investors.
All that seems obvious now and was obvious in 2017. But now I’m thinking of another company with lessons about secondary markets: eBay.
If there’s anything even less liquid than stock in a private company, it’s a used refrigerator, a bracelet you inherited from your grandmother, the clock you haven’t used for 15 years.
All those things and thousands more were once completely illiquid and therefore worth nothing. eBay changed that, almost miraculously adding dollars to everyone’s personal balance sheet. Just as every ATS operating today seeks to create an active market for securities, eBay created a market for refrigerators, bracelets, and clocks. Quite amazing when you think about it.
eBay didn’t create the market by turning refrigerators, bracelets, and clocks into NFTs. To the contrary, when you sell something on eBay you have to ship it, physically, using the lowest of low technology. eBay created the secondary market simply by connecting buyers and sellers using Web2. Just like another company that has created a pretty active market, Amazon.
If any ATS operating today had a thousandth of the registered users eBay has, its founders and investors would be even rubbing their hands with glee.
As a Crowdfunding advocate, I wonder what the world would look like if all those dollars and person-hours had been spent improving the experience of initial investors rather than pursuing secondary markets and blockchain, things dreams are made of. As the shine comes off blockchain maybe we’ll find out.
Questions? Let me know.
One thought on “What eBAY Tells Us About Secondary Markets For Private Companies”
Technology has never been the problem here and that is what the crypto weirdos get so wrong since most of them don’t have a clue about the restrictions on secondary sales. Also I have yet to see a compliant blockchain implementation that can actually lawfully allow for the exempt transactions that can be based on geography restrictions or accreditation. Most implementations to date use a “mechanical turk” model and “white lists” which is not scalable and concentrates risk.
It is true however that using multi-sig wallet techniques we could absolutely disrupt and decentralize the securities industry and is in fact exactly how our Transfer Agency (capsure.works) is being launched so that there is no single point of failure and no “custody” issues. It also could mean an end to escheatment.
Having just obtained clearance to begin operating an ATS this past week at Silicon Prairie Capital Partners under the SPPX moniker, which we will socialize as “Private Execution”, we are gearing up to navigate the landmines of Blue Sky laws that somehow magically kick in after a federally covered exempt security sold in an exempt transaction suddenly can become a concern for the state.
While we will likely begin in earnest leveraging the Section 4(a)(7) FAST ACT exemption for angel investment groups, we will be seeking “no action” letters from state regulators to treat “existing investors” as “accredited” since they are already knowledgable about a business and should be able to pre-emptively increase their holdings if they want to.
People have a right to liquidity and on their terms.
The biggest complaint I’ve heard to date from people who like to peddle FUD is that the ATS’s lack “market makers” — SO WHAT? 99% of the companies raising modest amounts of capital today using exemptions like REG-CF and D could not and should not afford to pay someone like OTC markets upwards of $25K per year plus the accounting costs just to offer their investors some possible liquidity!?
I believe that a company has a right to know who is on their captable and set the conditions for entry and egress. Our market is NOT for daytraders and in fact many of issuers have told us that if someone sells they are not welcome back in…