StartMeUp (SMU) Investimentos is almost ready to start testing a secondary market for startup assets originated in crowdfunding operations. At least three startups that made primary offerings via SMU are now ready to have their secondary operations launched. Starting in June, SMU intends to launch an offer of up to BRL 10 million per month through the project.
SMU’s project, which has Atris and nTokens as partners and a series of partners such as iugu and Demarest Advogados, was the fourth approved within the regulatory sandbox of Brazil‘s Securities and Exchange Commission (CVM) in December last year. Two months earlier, the Commission gave the green light to the Vórtx QR Tokenizadora (from the fintech Vórtx and the QR Capital), Basement, and BEE4 (the latter similar to that of the SMU).
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What SMU is proposing is creating a secondary market for securities issued or represented by a token (that is, a digital representation of a real financial asset on a blockchain) and originating from offers made on crowdfunding platforms in an organized over-the-counter market (i.e., in an environment with computerized systems and rules supervised by the CVM).
To get the idea off the ground, SMU will have two temporary licenses through the regulatory sandbox: secondary market manager in the organized over-the-counter modality and bookkeeper of securities. The securities to be traded will be book-entry by SMU and tokenized by nTokens. Atris, a tech company for capital markets, is the licensor of a US company that is the project’s technological partner but which, for contractual reasons, cannot have its name disclosed before the official launch of the platform.
SMU will also have to comply with specific conditions imposed by the CVM collegiate when the project is approved. As a lead investor in the crowdfunding investments it promotes, there could be a conflict of interest in SMU’s secondary operations. To prevent this from happening, the startup will need to create a special purpose vehicle (SPE, in the acronym in Brazilian Portuguese) for each secondary offering it launches under the new project, with an investment cap for each operation of BRL 10 million. “And blockchain technology is what will give investors security; will serve as a record book for these assets and operations,” SMU’s CEO Rodrigo Carneiro told LABS.
So, starting in June and for a year, SMU can make up to 10 listings of up to BRL 10 million each. These listings may come from investments promoted by the SMU itself or competitors in the segment (there are already advanced conversations with other platforms for their participation in the project). Brazil currently has ten crowdfunding platforms registered with CVM; in addition to SMU, CapTable and EqSeed are the largest.
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The offers timetable for the official launch of SMU’s project is already with the CVM. It includes six startups that have already had their primary offerings through SMU and four that have raised funds through other crowdfunding platforms. “Among these six, we already have some pre-selected, but we still need to settle contractual issues and verify if the companies can comply with obligations such as the recurring publication of results to investors,” Carneiro pointed out.
SMU wants to be able to publish an offer every month. The essential selection criteria are startups with a lot of demand in the primary crowdfunding operation. “If all goes well or if the CVM wants to do another trial period, it can renew this period for another year. CVM will also decide whether it will grant us the licenses [definitively] or create new types of licenses [for this new type of operation],” said Pedro Rodrigues, CTO at SMU.
The interest of investors in reselling the shares obtained through primary crowdfunding offers has existed since this type of operation was regulated in the country by the CVM back in 2017. “When the CVM regulated the activity, it clarified that platforms could not do secondary trading. But investors end up contacting us asking how they can sell their stake. We can help them in a very artisanal way. I cannot provide an environment for them to do this automatedly. So, what we do is indicate, for example, the types of contracts that he will need to have in hand to negotiate with the founders, reinforcing that we, too [as investors], will need to sign it. Serving these investors but also wanting to attract others who do not invest because we do not have a secondary market, we took advantage of this window of opportunity of the regulatory sandbox and knocked on the CVM’s door,” said Carneiro.
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SMU is not inventing the wheel but testing the creation of an ecosystem that is already well developed in markets such as the United Kingdom and Asia. “It is in these markets that we mirror ourselves. The United States is a particular, huge market, with specific rules in each state. It’s pretty complex. Here in Brazil, we already have a considerable market, reaching a level of repressed demand. We will not be able to increase [primary] funding much until there is a doorway for investors. It’s a dynamic cycle, and they want to be able to leave a company and invest in another,” pointed out Rodrigues.
Currently, an investor in startups needs to wait for some liquidity event to be able to “withdraw” their investment. The so-called “exit” happens when the startup is sold to larger companies, raises new VCs fundings, or even does an IPO.
In the view of SMU executives, Brazilian investors are increasingly open to taking risks, but they still don’t want to commit to such long terms for their investments. “It is common for investments in startups to last more than five years, as the return is linked to the moment of the development of the startup‘s business,” explained Diego Perez, co-founding partner of SMU who closely follows the discussions around CVM’s sandbox since 2019.
The secondary market is also an opportunity for investors to increase their position in startups they have already funded. This type of transaction can also be completed on the secondary market platform, having control and transfer of ownership of the paper registered in the blockchain.SMU currently has 31,000 registered accounts and 6,000 active investors on its platform, which had already exceeded the volume of BRL 52 million in investments in 40 transactions since 2015, when it started operating. The average ticket of investors on the platform is currently around BRL 12,000. In 2021 alone, the platform was the second most active, raising just over BRL 28.1 million in 15 rounds.