Secondary Market Listings in Equity Crowdfunding: The Missing Link?

While equity crowdfunding has grown in prevalence, investors have had very few opportunities to exit their investments. To address this, several equity crowdfunding platforms have started considering developing secondary markets for buying and selling shares. Using detailed data from the world’s first secondary market for equity crowdfunding, we investigate whether committing to list on the secondary market after the fundraising campaign leads to greater investor participation and thus helps entrepreneurs to raise more money during the campaign. We find that in the early days of the secondary market, making a pre-commitment to list attracted more investors and larger investment sums. However, this positive effect disappeared after the first 18 months of secondary market operation, most likely because investors realized the lack of liquidity on the secondary market and thus the fact that secondary markets are currently unlikely to constitute a viable exit route. Our findings offer valuable insights to platforms aiming at launching secondary markets and regulators responsible for validating such initiatives. In particular, equity crowdfunding would benefit greatly from liquid secondary markets, which however are difficult to achieve due to high information asymmetries, price formation difficulties, reputational concerns, and competition effects from the primary market.