Market Insight Update: Liquidity isn’t always a Given

Even though an issuer has permitted secondary deals in the past, there are several factors that may curtail future trades, impacting a shareholder’s path to liquidity.

In the course of business, if a company changes its bylaws related to secondary sales, the volume of secondary sales could be restricted dependent on how stringent the revised bylaws are. For instance, certain provisions could require board approval, having exercised shares before a certain date prior to new bylaws or add volume parameters to secondary sales. The profile of the buyer, and how it would impact the existing cap table presence, might inform an additional clause.

The private secondary market by its nature is contingent upon matching buy- and sell-side bids and offers. Constrained demand therefore might reduce liquidity opportunities. Secondary names can vary in popularity, potentially causing interest to wane once investors have obtained their target allocation to a particular company. Demand for the sector isn’t evergreen or present on an ongoing basis, meaning that once a buyer has purchased their mandated allocation, they will no longer be active in the secondary market for this specific issuer and instead focus on a new company to transact in. This is especially true for early-stage issuers or those with a sub $1 billion valuation.

Uncertain outcomes related to material news might similarly reduce liquidity, as the company may prioritize other initiatives. Events such as new funding rounds, legal issues, or executive transitions, may cause a company to shift its focus and allocate financial and legal resources elsewhere.

Utilizing an experienced broker dealer such as Rainmaker Securities will allow clients to obtain insight into secondary market activity and be proactively informed about potential liquidity considerations.