NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Tuesday, May 3, 2016

Equity crowdfunding promises to be a major new source of funding for small businesses. But some critics say it lacks a crucial element: a secondary market for most participating investors.

Under the Jumpstart Our Business Startups Act, startups can sell equity stakes online to small investors with limited resources. It’s a potentially huge opportunity for businesses that might fly under the radar of bigger backers.

Many observers, though, have pointed out a possible flaw in the setup: There isn’t an easy way for those equity investors to sell their shares to somebody else. Without a secondary market, the critics say, equity crowdfunding won’t take off and small businesses won’t be able to tap all that capital.

So far, the Securities and Exchange Commission hasn’t given the green light to a secondary market. Now Seth C. Oranburg, a visiting professor at Chicago-Kent College of Law, is pushing what he says is a way to jump-start the process: have crowdfunding portals hire analysts who would provide potential buyers with information about companies’ prospects and valuations. That way, he argues, a secondary market will be a much safer environment for unsophisticated small investors—and much more attractive for regulators to approve.