Startups used to all about going public. The US market saw more than 450 initial public offerings (IPOs) in 1999 alone right at the height of the dot-com boom.
This is not the case today. From 2015-2017, the yearly figure did not even tease 200. In 2000, it also only took ventures a span of three to five years for them to hold their IPOs. In 2016, venture-backed companies took somewhere between ten to twelve years.
This increased time span means that private company shareholders now have to wait before they are able to sell their shares in the open market. Should they decide to liquidate before IPOs, they have to resort to the secondary market and find investors interested in taking over their shares.
Fortunately, investor appetite for pre-IPO shares has risen. These assets promise massive returns down the line. This interest also allowed the secondary market to significantly grow over the past years. The value of shares traded in the global secondary market rose from just US$7 billion in 2004 to US$58 billion in 2017.
The growth in secondary trading has not been overlooked. Various efforts are being made to take advantage of opportunities the market now presents. Technologies such as blockchain and security tokens – crypto tokens that function as company shares – are also being leveraged to deliver new mechanisms for secondary trading.
The blockchain advantage
Blockchain technology has the ability to tokenize assets such as company shares and securely facilitate their trade. Because of this, blockchain-based platforms and exchanges are now emerging to deliver new trading mechanisms to the market.
For example, trading platform The Elephant creates dedicated partnerships that buy shares from existing shareholders of pre-IPO companies. It then uses blockchain to tokenize participation rights to these partnerships. The rights can then be readily traded in the form of security tokens.
Without such mechanisms, it is often challenging for shareholders and interested investors to connect with each other. Transactions also often require significant capital and effort to pull off when coursed through traditional means. Through such platforms, sellers can easily liquidate their assets and buyers can easily acquire shares. Fractional ownership can even be an option should the tokens be fractionally tradable.
Regulations, or the initial lack thereof, have somehow delayed the adoption of security tokens for secondary trading. It was only in light of failed and fraudulent coin offerings that regulatory bodies stepped in to provide protection to investors. Prior to formal regulations coming out, several territories halted many key crypto activities.
Last year, the United States Securities and Exchange Commission (SEC) ruled that crypto tokens that function as securities have to abide by securities law. Other territories followed suit, putting forward regulations that defined how to conduct coin offerings and token sales and who can participate in them.
Despite increased restrictions, these rules actually make compliance achievable. It is now easier for coin offerings to feature mechanics that do not skirt around laws. Legitimate efforts by companies to offer security tokens could now be more capably pursued.
Big players moving in
These developments are prompting more players to move into the space. Overstock now offers a security token platform through its subsidiary, tZERO. The venture made waves when Kodak chose the platform to facilitate secondary trading of its KodakCOIN token.
Major crypto exchanges Binance and Coinbase have both announced their intention of listing such tokens on their respective platforms. The listing of security coins in such exchanges would only provide investors with better liquidity.
The Elephant is also currently in serious negotiations to acquire more stocks from shareholders of top-tier pre-IPO companies based in the US, Europe, and Asia. If successful, these would add to the company’s portfolio that is currently worth over $70 million. The company recently secured Compass Blockchain Solutions as advisor for its planned security token offering.
SharesPost is also set to expand its offerings to include security token trading after raising US$15 million from a Series C funding round. Such moves from both established and up-and-coming ventures only back up speculation that security tokens will be the next big thing.
Blockchain and security tokens are poised to become game changers for the secondary market. They provide shareholders new avenues for liquidity especially now that the road to IPOs have become longer. They also lower the barriers for ordinary investors to acquire pre-IPO shares of innovators and unicorns.
With clear regulations now available, investors and companies could have more confidence in trading and investing in security tokens. The entry of established players into the space and the aggressive moves they are making only affirm the presence of opportunities in the secondary market.