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August 19, 2022 | 3 Min Read

Proposed Changes to Secondary Trading – Could This be a Gift from the SEC?


Proposed Changes to Secondary Trading – Could This be a Gift from the SEC?

In 2012, at the outset of equity crowdfunding when the JOBS Act was voted into law, it introduced Regulation A+ to allow companies to raise up to $50M from the crowd. The Securities Exchange Commission (SEC) then upgraded the regulation to allow a whopping $75M per raise. Now, the Commission is considering new rule changes, and it could mean something wonderful for the world of equity crowdfunding.  

A key feature of Reg A+ is that shares issued under this exemption are freely tradable – meaning investors have the option to sell those securities down the road. But, when Reg A+ officially launched in June 2015, there were virtually no platforms where you could actually trade. That’s why StartEngine created its Secondary trading platform at the end of 2020. Since then, other Alternative Trading Systems (ATS) have followed.

Even after the creation of StartEngine Secondary and other ATS, though, the ability to trade shares issued under Reg A+ still faces large obstacles. The main issue is meeting each of the 50 states’ separate regulations. Not only do they differ state-by-state, some are also very restrictive, allowing only 3 trades per year. Still, other states want to review and approve each company before going on a secondary platform. Most States do accept a manual exemption – which essentially means you can spend $5,000 to get a company on the platform. But you can imagine how these costs can be prohibitive, especially if all you want to do is trade $200 worth of stocks or a $500 investment in fine wine.  

So if the SEC allows shares to be traded, why all the complexity?

What really needs to happen is something very simple that already happened with Regulation Crowdfunding: preemption. For Reg CF, the SEC preempted all 50 state filing requirements.  This means that funding portals, like StartEngine, could issue securities without worrying about individual rules for each state. The effect was to make Reg CF cost-effective and broadly adopted. So what about secondary trading?

Enter the SEC’s Small Business Advisory Committee (SBAC), which reviews how to best shape regulations for capitalizing small businesses. Basically, they advocate for the small guys who need the most help funding. Well, in a recent recommendation to the SEC, the SBAC’s majority view was that secondary liquidity is fundamental to getting more investors and that the Commission should preempt state requirements for trading Reg A+ shares.  

The SBAC’s findings make sense too. After all, when you raise money, some investors will want to be able to sell their stake. The beauty, though, is these cash-out investors can then redeploy the money into new offerings, supporting more businesses, and so on. By contrast, imagine buying shares in an IPO with a 5-year trade restriction – no one would go for that.

The SBAC’s recommendation is good, but the SEC still needs to write and approve the new rules. As is often the case with regulation, this process could take months or even years. In the meantime, StartEngine plans to make a dent in solving this problem by relaunching its Secondary marketplace – albeit with the challenges of dealing with 50 states.

Life is good in the world of equity crowdfunding, but with this regulatory gift from the SEC, it could be even better.

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StartEngine Marketplace (“SE Marketplace”) is a website operated by StartEngine Primary, LLC (“SE Primary”), a broker-dealer that is registered with the SEC and a member of FINRA and the SIPC. StartEngine Bulletin Board ("SE BB") is a bulletin board platform that advertises interest in shares of private companies that previously executed Reg CF or Reg A offerings. SE BB enables shareholders to communicate interest in potential sales of shares in private companies and investors to discover, review, and potentially invest in private companies. As a bulletin board platform, SE BB provides a venue for investors to access information about private company offerings and connect with potential sellers. SE BB is distinct and separate from StartEngine Secondary (“SE Secondary”), which is an SEC-registered Alternative Trading System (ATS) operated by SE Primary. SE Secondary facilitates the trading of securities by matching orders between buyers and sellers and facilitating executions of trades on the platform. While a security may be displayed on the bulletin board, these securities will be subject to certain restrictions which may prevent the ability to buy and sell these securities in a timely manner, if at all. Even if a security is qualified to be displayed on the bulletin board, there is no guarantee an active trading market for the securities will ever develop, or if developed, be maintained. You should assume that you may not be able to liquidate your investment for some time or be able to pledge these shares as collateral.

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