With the turmoil public markets have faced in recent months, it’s no wonder we haven’t seen a flood of IPOs in the first quarter of 2022. Companies pausing IPO plans , this means that employees seeking to liquidate their shares are increasingly turning to the secondary markets.
Secondary markets allow investors to buy shares from employees of private companies and early stage investors with equity in a company, rather than buying from the company itself. This secondary market trading allows employees to cash in sooner, instead of waiting for an IPO. There are several platforms available that allow shares to be traded prior to IPO.
Unlike primary market pricing, which is determined beforehand, secondary market pricing is more based on supply and demand. The more investors rush to buy a stock in the belief that its value will rise, the more that stock’s price will continue to rise.
According to a recent article from Crunchbase, “The heightened interest in selling stocks on the secondary market has already begun to be reflected in falling startup stock prices.” The article points to information from the secondary market platform Equity Zen stating that “more shareholders are comfortable selling stocks at prices below what they would have done at the end of the year. last year in a robust IPO market”.
In fact, EquityZen told Crunchbase that they see shares of some companies trading 10-30% lower in Q1 2022 than they were in Q4 2021. EquityZen predicts that when primary rounds will have place for these companies, they will likely reflect these lower prices. While public markets have seen significant multiple compression and the IPO window has not been favorable for new entrants in 2022, we are seeing signs of a trickle-down effect on primary funding from private companies.
As many factors continue to affect our public markets and create volatility, the secondary markets will undoubtedly remain an attractive option for employees and early investors to liquidate their stocks. It remains to be seen whether this increase in secondary market formation will continue once companies start doing IPOs in greater numbers, and what kind of real impact all of this will have once these companies begin. to trade on public markets.
© 2022 Foley & Lardner LLPNational Law Review, Volume XII, Number 77