Crowdfunded Securities and Investor Liquidity

Andrew Wicklander and I had a discussion via Skype yesterday that he recorded for his podcast series. We were talking about the JOBS Act. For the most part, our discussion followed a theme of how the new law improved existing ways, and offered new ways, for entrepreneurs to seek capital.

Looking for the exitBut Andrew kept hitting one question, an important one, that was from the perspective, not of the entrepreneur in the first instance, but of the investor. He kept asking, and I kept not answering, how will those who invest in a crowdfunded deal "exit?"

"Exits" are a big deal to venture capitalists and angel investors. The anxiety over the relative dearth of IPOs drove the VC community to push for the IPO on-ramp (Title I of the JOBS Act). And the increase in the shareholder number threshold (Title V of the JOBS Act) was an attempt to mitigate constraints on company liquidity events by making it even more feasible for individual investors to sell their unregistered shares on private secondary markets.

One invaluable member of this blog's community, David Fisher, is focused on community exchanges, and I'm sure he is thinking through the crowdfunding liquidity "problem" (I have to put "problem" in quotes, because the crowdfunding exemption hasn't even been implemented yet!).

I find David writing this on his Cool Projects Maui blog:

"The Friends of the Hawaii Local Exchange that have been researching bring back community exchanges will probably start by doing crowd funding with accredited investors only."

Speculating here, but it could be that David is picking up on language in the crowdfunding exemption dealing with restrictions on the ability of investors to re-sell their crowdfunded securities. Here's that language from the Act:

`(e) Restrictions on Sales- Securities issued pursuant to a transaction described in section 4(6)--

 `(1) may not be transferred by the purchaser of such securities during the 1-year period beginning on the date of purchase, unless such securities are transferred--

 `(A) to the issuer of the securities;

 `(B) to an accredited investor;

 `(C) as part of an offering registered with the Commission; or

 `(D) to a member of the family of the purchaser or the equivalent, or in connection with the death or divorce of the purchaser or other similar circumstance, in the discretion of the Commission; and

 `(2) shall be subject to such other limitations as the Commission shall, by rule, establish.'

So, lacking a sale of the company or IPO, angels are to be the crowdfunding investor's liquidity route? (See paragraph (1)(B) above.)

Photo: Exit? by herby_fr / Flickr.


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