A secondary market for crowdfunding investors rises in Chicago
With the continual growth of crowdfunding, a new marketplace has emerged in Chicago to address the next step in crowdfunding's evolution. CFX, which opened to the public earlier this year, is a crowdfunding secondary marketplace, designed as a platform where crowdfunding investors can go to exit their positions.
"We knew that one of the biggest hurdles left in the industry was one of liquidity. It's not only an issue with crowdfunding, it's an issue with all private investments," said Juan Hernandez, CFX managing director. "So we set out to take on that challenge, to give private investors the same freedom and flexibility that the public markets have."
The founders of CFX believe that for the crowdfunding market to continue to develop, crowdfunding investors need ability to move in and out of positions and rebalance their portfolios if the need arises.
Crowdfunding platforms apparently agree. Last year CFX partnered with five platforms on a trial basis. Since opening its doors to a wider market at the start of 2016, the company has already grown to 22 platform participants, with two more in the onboarding process.
Initially, CFX has worked with real estate crowdfunding platforms such as PropertyStake and PeerRealty.
"It's one of the bigger industries. People understand real estate and it easy to price," explains Hernandez.
Instruments sold on the platform have generally averaged about three to five years in duration, Hernandez said. There are real estate marketplaces offering shorter duration financing, but there is less need to exit shorter-term investments. Sellers who use the platform must be vetted by CFX to verify ownership of the positions they are selling. In cases where sellers come from platforms CFX has partnered with, the partner platform assist with the vetting process, making it more seamless. Other private investors can sell positions on the platform but the vetting process is more manual and lengthy.
CFX hides the identity of the seller for privacy purposes, but otherwise discloses full details of the investment, including initial investment and terms, current sale price, and all information that could give the secondary investor an indication of how the instrument is performing, such as interest payments and whether there have been distributions in the assets or dividend payments.
"We want the potential new buyers to have a complete picture of the health of the asset, so they can see if it has been performing as projected or if it is lagging," Hernandez said.
The market has functioned with an auction-type model initially, but as liquidity grows and the market matures, Hernandez expect the market to develop more of a bid-ask model. To build liquidity, CFX has invited select experienced preferred buyers to provide liquidity to the platform.
"They are not true market makers because they are not providing guaranteed liquidity but they are preferred buyers who have a history in alternative assets and secondary markets," Hernandez said.
Like sellers, secondary market investors must also be fully vetted to participate in the platform.
Meanwhile, CFX carefully selects its platform partners as well, looking for platforms with a healthy number of assets and a strong user base. CFX has seen strong interest from crowdfunding platforms, Hernandez said, because they see it as a selling point to investors.
"They can tell their investors you can invest with confidence because you won't be stuck if you need to change your position for whatever reason," Hernandez said. "That level of confidence gives investors comfort in participating in initial deals, because they know if in 18 to 24 months their financial situations change they have the option to seek liquidity on a centralized platform."
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