CROWDESTOR Secondary Market: Rules of the Game

CROWDESTOR is thrilled to announce that on the 2nd of October we have launched a Secondary Market (SM). SM gives an option to sell your investment to another CROWDESTOR client before the maturity date of your holding.

The existence of a Secondary Market is making the life of investors easier on the one hand, and tricker on the other hand. What are the rules of the game when you are buying not on the Primary Market?

CROWDESTOR is proud to offer our clients an opportunity to exit their investments before the maturity date, or to invest in projects that have been sold out before they had a chance to participate in. While the Secondary Market is only a week old, we are already collecting valuable feedback from investors about possible improvements, or new features they would like to see. The CROWDESTOR Secondary Market will only get better and will continuously improve. While the SM will evolve, some things will not change- the basic principles on how to correctly make decisions and what to look out for.

Difference between Primary and Secondary Markets

The Primary Market consists of loan deals that were originally published on CROWDESTOR. We have conducted due diligence, agreed on the future repayment schedule, and financials. CROWDESTOR considers these deals as an attractive investment and passes the ability to earn a premium return on these projects to our investors.

The crowdfunding investments are known to be a less liquid asset than shares, for example, which can be sold on the stock exchange anytime. Investors usually must wait until the maturity date to get the principal back. Not anymore –

 the secondary market allows you to sell your investment and get the principal back (at a discount or premium) before the end of the project.

Life circumstances might change, so having such an option gives investors assurances. However, the existence of a secondary market creates a new kind of supply and demand forces. Secondary Market can have the same characteristics as the stock market: demand, supply, discount, and premium. On the SM unlike on the Primary Market, where the central operator (CROWDESTOR) is creating supply and the terms of the deal, independent players interact with each other – this requires a rulebook.

Why We Need Regulation?

The stock market is heavily regulated and makes all participants in the trading process legally responsible. The crowdfunding industry, on the other hand, is unregulated in the EU now, but it hopefully will change very soon. The European Parliament on the 5th of October has approved the rules governing crowdfunding platforms proposed by the EU Council, see the latest update. However, it is still not clear how it will apply to the Secondary Market.

Lessons from Wall Street

So, why exactly we need regulation to cover the SM, and what can we learn from the stock market regulation? While on the Primary Market the client deals directly with CROWDESTOR and can only invest (buy) the offered deals, on the SM the client deals with another CROWDESTOR clients, and can act as the buyer, or a seller.

On Wall Street – there is such a phenomenon known as a False Market. The false market can occur when someone manipulates the information about certain assets and prevents the efficient negotiation of prices. In other words, there are rules by financial regulators across the world prohibiting to spread false information.

Everyone seemed to agree and comply for a long time, as the punishment is quite severe, including imprisonment. However, in 2014 it became apparent that some traders calling themselves “the players”, “the A-team” and other pseudonyms, used to spread false information in the traders’ dedicated forex chats.

While the SM by no means can be compared to the forex market, not in terms of liquidity, not in terms of the number of participants, but it still is can be affected by the information. It is important to switch on critical thinking when buying on the secondary market. It is important to understand the underlying reason why some projects are sold at a discount.

The Key Takeaway

Investing in any kind of asset should be done with a clear head. Constructive decisions have to be made, with no panicking, no affection. Even if the asset is risky, but it fits your investment portfolio, do not rely on rumors or manipulations of others, make your own analysis, and made a conscious decision. This applies to the Primary Market, as well as to the Secondary Market. We urge our clients to make responsible investment decisions and put emotions aside when pressing “buy”, or “sell” buttons.

CROWDESTOR wishes you great returns and balanced portfolios.