secondary market trading Archives

7 Golden Rules for the Secondary Market

Posted on April 12, 2023 by Oscar Jofre

Secondary markets provide investors a way to trade securities they have previously purchased or buy new ones offered by other investors. This blog will look at the seven golden rules of secondary markets as well as how these rules are enforced through JOBS Act regulations.

What is a Secondary Market?

A secondary market is an organized platform that provides investors with the opportunity to buy securities from other investors, rather than from the issuer itself. It allows investors to have more flexibility in trading their securities and opens up the potential for greater liquidity. Secondary markets can be used to buy or sell almost any type of security, including stocks, bonds, options, futures, derivatives, and commodities.

How an ATS Differ from an Exchange

When trading securities on a secondary market, it is vital to understand the different types of Alternative Trading Systems (ATSs) available. ATSs are electronic trading platforms that can be used to trade securities without going through a traditional exchange. These systems can provide investors with greater liquidity and flexibility in trading their securities than what is available on an exchange.

Like an exchange that brings together buyers and sellers of securities, an ATS does not take on regulatory responsibilities. This means that an ATS can trade both listed and unlisted securities, like those purchased under a JOBS Act exemption. ATSs are also regulated by the SEC but must be operated by a FINRA-registered broker-dealer.

The 7 Golden Rules of Secondary Markets

To ensure that transactions are compliant with security regulations, both issuers and investors should consider the following rules when transacting on a secondary market.

Rule 1: Know Your Client (KYC) – Before conducting transactions, there must be a KYC procedure carried out by the broker-dealer. This helps to identify potentially risky investors and ensure that steps are being taken to prevent fraud, money laundering, and other illicit activities.

Rule 2: Disclose Financial Data – Issuers must disclose all relevant financial data before engaging in a transaction on the secondary market. This includes any material changes that have occurred since the last disclosure was filed. From an investor’s perspective, it is important to understand the financial health of the issuer before investing in their securities. This can be achieved by viewing the issuer’s financial statements, annual reports, and/or audited financials. Transparency is crucial in building trust with investors, and failure to disclose pertinent information can result in legal repercussions that can affect the trading of your security on the secondary market.

Rule 3: Respect Minimum Price Fluctuations – When trading on the secondary market, investors must always respect price fluctuation limits set by the governing body. These limits are designed to protect both buyers and sellers from extreme volatility or manipulation of the market. With most investors not being able to trade JOBS Act securities on the secondary market for at least a year, these limits help protect investors from quick market movements while providing issuers with stability.

Rule 4: Execute Trades Quickly – All trades on the secondary market must be executed quickly to ensure that buyers and sellers are getting the best price attainable. This is especially important with JOBS Act securities, as they are subject to strict time frames for when trading can take place. By executing orders promptly, investors can maximize their profits and minimize losses.

Rule 5: Follow Market Regulations – All transactions on the secondary market must adhere to governing body regulations, such as those set forth by the SEC, FINRA, and other regulatory agencies. This ensures that trades are conducted fairly and within legal bounds. It also protects all parties involved in a transaction from fraud.

Rule 6: Adhere to Securities Laws and Regulations – Issuers must comply with all applicable securities laws and regulations when trading on the secondary market. This includes complying with JOBS Act regulations, such as Regulation A+ and Regulation Crowdfunding. Failure to comply with these regulations can result in fines, penalties, and legal action.

Rule 7: Maintain Good Communication with Investors – Issuers should maintain regular and open communication with investors, providing updates on the company’s performance and any important developments. This helps to build trust and confidence in the relationship between the issuer and the investor. Good communication can also help to mitigate potential issues or conflicts that may arise in the future.

Overall, secondary markets can offer a variety of benefits to both investors and issuers, including greater liquidity and flexibility in trading securities. However, both parties need to follow the rules and regulations governing these markets to ensure fair and secure transactions. By adhering to the seven golden rules of secondary markets, investors and issuers can mitigate risk and build trusting relationships that can lead to greater success in their investment endeavors.

What Does ATS Mean in Trading

Posted on June 8, 2022June 9, 2022 by Oscar Jofre

Many investors are turning to the private capital market to make long-term investments in light of the current market conditions. This has increased alternate trading systems and secondary market trading for RegA+, RegCF, and RegD securities. An alternate trading system (ATS) is a non-exchange trading venue that matches buyers and sellers to trade securities. In the United States, an ATS must be registered with the Securities and Exchange Commission (SEC) and must comply with specific regulations.

Different Forms of ATSs

There are many benefits to using an ATS, such as increased liquidity, lower costs, and greater flexibility. For example, an ATS can provide more liquidity for a security by providing shareholders with a means to sell private company shares. In addition, an ATS may offer lower costs than an exchange, such as no membership fees or listing requirements. In addition, an can often be categorized as an electronic communication network, dark pool, crossing network, or call market.

Electronic Communication Network: An ECN allows buyers and sellers to exchange shares without a middleman. Trades can also happen outside of business hours, which means that hours are not tied to the traditional stock market.
Dark Pools: A dark pool is a type of ATS that does not publicly display the prices or orders of its participants. Dark pools are typically used by institutional investors, such as hedge funds, to trade large blocks of shares without moving the market.
Crossing Network: A crossing network is very similar to a dark pool, meaning that the details of a trade are not made publicly available
Call Markets: In a call market, trades are only executed once a certain number of orders has been reached, often at a set interval of time.

Secondary market trading of RegA+, RegCF, and RegD securities can take place on an ATS, which is typically a registered broker-dealer platform. These platforms allow investors to buy and sell these securities even if the buyer did not invest in the initial offering. The secondary market for RegA+ securities is the most developed due to the long history of these securities. The main difference is that RegCF and RegD shareholders are required to own their securities for a longer period of time before they can be traded in a secondary market.

What is the Difference Between an ATS and Exchange?

Many people are familiar with the concept of an exchange; whenever you buy stocks in publicly traded companies, you go through a stock exchange like the New York Stock Exchange or NASDAQ. National securities exchanges are self-regulatory and their members, or listed companies, must meet the requirements established by the exchange. Exchanges are also SEC-registered

An ATS is much like an exchange in that it brings together buyers and sellers of securities. However, the main difference is that an ATS does not take on regulatory responsibilities. Therefore, an ATS can trade both listed and unlisted securities, like those purchased under a JOBS Act exemption. ATSs are also regulated by the SEC but must be operated by a FINRA-registered broker-dealer.

The Impact of Liquidity on Investing

Liquidity is an important concept to understand when trading securities and refers to the ability of a security to be bought or sold quickly and at a fair price. A security that is easy to buy and sell is said to be liquid. A security that is difficult to buy or sell is said to be illiquid. An investor might consider the liquidity of a security when making an investment decision. For example, an investor might choose to invest in a liquid security if they plan on selling it quickly. An investor might choose to invest in an illiquid security if they are willing to hold it for a more extended time. When trading securities on an ATS, it is crucial to consider the security’s liquidity. A security that is not liquid may be challenging to sell, and worth considering the liquidity of a security before investing in it.

Secondary Market Trading for RegA+, RegCF, and RegD

Posted on March 7, 2022October 7, 2022 by Oscar Jofre

As more and more companies look to raise capital in the private capital market, it’s essential to understand the different exemptions available for this purpose. In this blog post, we’ll look at three common types of capital raises; Reg A+, Reg CF, and Reg D. We’ll discuss the critical differences between each one and how they are traded on the secondary market. By understanding the nuances of each type of raise, you’ll be better equipped to make informed investment decisions.

If you are raising capital, three main exemptions will be used in the private market. Before we discuss the differences, let’s cover what each regulation does:

RegA+ is a securities exemption that allows companies to offer and sell securities to US investors and raise up to $75 million in a 12-month period through Reg A+.
RegCF allows companies to offer and sell securities to US investors and raise up to $5 million through online marketplaces and crowdfunding sources in a 12-month period.
RegD is a securities exemption that allows companies to raise capital from accredited investors without limit within a 12-month period.

There are a few key differences between the three types exemptions but today we’re focusing on those differences as they pertain to the secondary market. The important thing to consider is the time an investor is required to hold the security before selling it on a secondary trading platform. Reg A+ is the closest to an IPO, and assets can be sold the next day, and there is no lockout period. On the other hand, securities sold under RegCF cannot be sold for the first 12 months after buying it unless it’s sold to an accredited investor, back to the issuing company, or a family member. With Reg D, investors can not sell these assets for six months to a year unless they are registered with the SEC.

We’ve covered other differences between the three exemptions in a previous article, including the number of investors and the amount they can invest. However, once the raise ends, the secondary market is the next important difference to be aware of so that shareholders can be properly informed before, during, and after the raise is complete.

Private Securities and Crowdfunding Surge is Forecast to Continue in 2022

Posted on January 7, 2022May 13, 2022 by Rialto Markets

This article was written by our KorePartners at Rialto Markets. View the original post here.

Crowdfunding had another record year in 2021 and is forecast to soar even higher in 2022.

According to Pitchbook data, global crowdfunding exploded from $8.61 billion in 2020 to $113.52 billion last year – a 1,021% increase. The US market alone doubled year on year through Regulation CF and A+, with much higher numbers being raised and over 32% oversubscribed, according to SEC (Securities & Exchange Commission) filings.

Recent analysis of key US private equity crowdfunding platforms such as Wefunder and Republic, showed their top 50 most invested Regulation CF (raises of up to $5 million) crowdfunding offerings raised more than $171 million in November alone from over 113,000 investors – an average of $1,315 per investor – while December tracked at similar levels going into the holiday season.

In the Regulation A+ category, where private companies can raise up to $75 million annually, SEC EDGAR filings for 2021 show 343 US-based high growth private issuers raised $8.6 billion in total.

The peak months for Regulation A+ capital raises were November and December, suggesting that 2022 will double the amount raised last year.

The market is also expected to expand significantly in 2022 and 2023 as regulated alternative secondary market trading platforms, known as ATSs, start to offer more potential liquidity in a private securities market set to grow from $7 trillion in 2021 to $30 trillion in 2030, according to Forbes.

Innovative US-based broker-dealer and a leading ATS provider specializing in private securities, Rialto Markets, predicts this trend will continue as more and more ambitious private companies in the US and worldwide apply this approach to their fundraising, leading to future secondary share trading.

Rialto Markets’ COO and Co-founder Joel Steinmetz said: “There were record months in the US crowdfunding sector during the first half of 2021 – with May being the highest – but there was a much steeper growth curve in the second half of the year, with record investment levels in the final quarter.

“We see Regulation CF and Regulation A+ public offerings complementing each other and while April was the lowest capital raising month, the sector surged in late summer, and November closed as the highest month.

“December in the US now looks like it may have matched or exceeded November, which sets the tone for a buoyant 2022, according to our research, and data coming from the major crowdfunding platforms and authorities like Pitchbook.

“We are seeing this pattern ourselves with over $730 million in signed contracts for Rialto Markets at the start of 2022 alone from high growth private companies in the primary market, using our broker-dealer infrastructure and technology.

“Additionally, in the secondary market, we are being swamped with requests from high growth private companies and marketplaces that offer fractionalized securities wishing to offer regulated trading to their investors through our SEC and FINRA regulated ATS secondary trading platform.”

Digital Twin pioneer Cityzenith, a company with three successful crowdfunding raises in three years, saw a big upsurge in investment during December and early January towards the 1^st quarter 2022 close of its final $15 million crowdfunding raise.

It will then move onto funding from institutions that have followed the company’s rise during this process.

Cityzenith CEO and Founder Michael Jansen said: “Crowdfunding isn’t for the faint-hearted. You must have a strong strategy, a large following, and investors who are going to back the offerings from the outset.

“But it’s also about positioning the brand to win new partnerships and potential larger institutional investors due to the momentum you build through these Regulation CF and Regulation A+ investment offerings.”

The electric vehicle company Atlis Motors had one of the fastest and most over-subscribed Regulation CF raises of 2021, attracting its full $5 million in just a few weeks with 4,123 new investors, further illustrating the importance of building a community of investors and advocates for the future of your brand.

Shari Noonan, CEO and Co-founder of Rialto Markets – the broker-dealer for both Cityzenith and Atlis Motors – responded: “These are impressive and ambitious private companies who know what it takes to prepare and build a community for either a smaller Regulation CF raise or a much larger Regulation A+ offering.”

“2022 is going to be a massive year for the private securities market, especially Regulation CF and Regulation A+ capital raising campaigns for high growth private companies.

“We are especially excited about movement in secondary trading for private companies, and by providing a platform to potentially unlock value for investors much earlier through a regulated ATS such as our own Rialto Markets secondary trading platform.”

As a Canadian Company, can Canadians Invest in Your RegA+?

Posted on September 22, 2021 by Oscar Jofre

We have extensively discussed how Americans can invest in securities offered under Regulation A+. However, Canadian companies can also use the exemption to raise capital to fund their businesses. Despite the ability for Canadian companies to use Reg A+, this was a decision made by US regulators, as the JOBS Act is a US, not Canadian, law.

Because Reg A+ is a US regulation, it makes it incredibly simple for Canadian companies to raise money from investors based in the United States. They go through the standard procedures for Tier 1 or 2 offerings before making the offering available to investors. On the other hand, Canadians investing in Canadian companies through Reg A+ is a little more challenging to be done.

In theory, it is possible. The issuer would need to be qualified in each Canadian province they are conducting the offering in. They can seek a Canadian equivalent of a broker-dealer to structure the offering so that investors can invest. In practice, this is not done very often, as meeting compliance requirements for all Canadian provinces is challenging in addition to US compliance requirements. In addition, the cost would be far more than the potential upside. Interestingly enough, Canadian regulators have created rules for secondary trading that give Canadian investors more opportunities to invest. Canadian investors can “hop the border,” so to speak, and buy securities in a secondary market transaction. This allows Canadians to purchase securities in a Canadian company.

Even though Canadian companies could technically raise money from Canadians under Reg A+, it is often cost-prohibitive. That does not mean investors are out of luck. Through secondary market transactions, Canadian investors can purchase securities in Canadian companies, allowing them to become shareholders.

Why do I need Blue Sky registration for Secondary Trading?

Posted on September 20, 2021January 18, 2024 by Oscar Jofre

Through the Regulation A+ exemption, securities issuers can raise up to $75 million as of March 2021. This creates a significant opportunity for the everyday investor to make investments in private companies and for the companies to benefit from the large number of investors that exist within this space. Unlike securities purchased on a national securities exchange, like the NASDAQ or New York Stock Exchange, investors in private companies have been somewhat limited in their options for liquidity.

This created the need for a secondary market on which investors could sell shares to other interested buyers, rather than waiting for the company to go public through an IPO to sell their shares. However, when it comes to enabling investors to be able to access secondary market platforms for their shares, there are a few things issuers need to consider.

First, just as the original offering has to comply with the Blue Sky laws in the states they choose to do business in, secondary market trading falls under the same requirements. For offerings that fall under the Tier 1 Reg A+, offerings are required to meet the blue sky requirements in each state and must be reviewed and registered by the state and the SEC. For Tier 2 offerings, the offering preempts Blue Sky laws and does not require review and registration. Some states also require issuers to work with a broker-dealer for the offering, so issuers should pay careful attention to that requirement when preparing their offering.

Similarly to complying with the laws governing raising capital, issuers must also comply with the laws that govern secondary trading markets in the states they are looking to make secondary trading available in. Since Blue Sky laws vary between jurisdictions, it can be difficult for issuers to maintain compliance with the laws in each state. In this case, issuers can file for “manual exemption” of the Blue Sky laws, accepted in numerous states. This means that issuers can qualify for secondary trading as long as they meet disclosure requirements, like meeting financial standards and ensuring that key company information is listed in a national securities manual.

While meeting compliance requirements to offer secondary trading to investors may seem like a challenging task, working with a broker-dealer can ensure you are meeting all requirements. As an issuer, once you can offer secondary trading, your investors will benefit from liquidity options for their shares.

Tag: secondary market trading