Investors to trade crowdfunding shares

A crowdfunding website will allow investors to trade their shares with each other for the first time in a move that signals the growing popularity of the asset class.

Seedrs, the UK’s second-largest crowdfunding company, will next month launch a secondary market for shares bought on its website, allowing investors to sell down or increase their stakes.

Some of the platform’s most most susccessful fundraising has been for emerging tech companies, including POD Point, a supplier of electric car chargers, and Moteefe, an online marketplace for fashion designers.

The absence of a secondary market has been one of the major downsides to equity crowdfunding to date, with investors being required to hold their shares in a start-up until it lists on the stock market or is bought out.

Jeff Lynn, chief executive officer of Seedrs, said the launch of a secondary market was the “natural evolution” of crowdfunding.

However, the company, which is backed by high-profile fund manager Neil Woodford and City grandee Lord Rothschild, will not offer full and unrestricted trading straight away.

Seedrs said it would first launch a “beta” version of its market, which will only open for trading for a one week a month. It will also only allow a share to be traded between two people who already hold shares in that company.

Mr Lynn said this was to prevent some investors trading with more knowledge of a company than others — unlisted companies generally give financial updates only to their investors, and not the wider market.

The platform has also said it will fix the price of the shares trading on its marketplace to the last valuation Seedrs agreed to, rather than allowing supply and demand dynamics to dictate the price.

“This will be the simplest version, I’m confident that what we’re announcing will work,” said Mr Lynn, who added that in “two to three months” the company would look at removing some of these restrictions following conversations with the companies being traded.

“There’s a lot we need to understand about how it will work and how users actually use it,” said Mr Lynn.

While Seedrs will be the first crowdfunder to launch regular secondary market trading sessions, other companies have attempted to increase share liquidity by arranging share purchases on specific companies.

Earlier in the year, rival Crowdcube organised a one-off share buyback for investors in Celixir, a small unlisted biotech company.

In December last year, the City watchdog published an update on its review of crowdfunding rules, signalling intentions to tighten its regulations on both equity crowdfunding and peer-to-peer lending.

The Financial Conduct Authority said it was concerned that investors might find it difficult to assess the risks and returns they were taking on by investing through a crowdfunding website, and that some start-ups’ financial promotions may be misleading.

In early 2015, the regulator said crowdfunders risked giving a “misleading or unrealistically optimistic impression of investment” while attracting customers with limited experience of investing.

While equity crowdfunding is popular among retail investors, the market has not grown as rapidly as peer-to-peer lending. Unlike P2P lending, equity crowdfunding investments cannot be held in an Isa.

According to figures from AltFi Data, start-ups have raised around £92m through Seedrs since it launched in 2012. Its rival Crowdcube is the only larger UK crowdfunder, having originated £190m of deals since 2011.