A primer on crypto secondaries
Jun 30, 2023
It is well-understood and accepted that private secondary markets are less liquid and more costly to transact than public markets. However, with numerous dedicated secondaries platforms and various specialist OTC brokers you are relatively well-served if you ever wanted to buy or sell private shares in popular growth companies.
But if we look at the crypto secondaries market, we will find that it is magnitudes more opaque, more costly and - perhaps worst of all - totally underserved by the incumbent secondaries platforms. Such that the discoverability of participants (be that buyers, sellers or brokers) becomes the most pressing and significant barrier to transacting. And hence the reason why we started Bulletin.
When we interviewed our prospective users (VCs, family offices, employees & angels) we found that a sizeable portion had limited experience with secondaries, and understandably had a number of important questions about the whole process. We gathered that besides limited avenues for discoverability, a lack of broad awareness about the customs and operations of secondaries markets may be a reason why some buyers & sellers do not explore this option further.
Hence, we put our heads together with the team at web3 Studios in order to fill this gap and create a primer for all things crypto secondaries. The below is an excerpt that focuses on the operational steps in the secondary sales process.
For more information and insights please see the full report here.
The private secondary sales process
While a sale of public shares/tokens is a fairly automated and streamlined process that many of us have experienced, the sale of private assets is much more manual and variable. No two OTC trades are exactly alike, but for anyone who has ever wondered how these deals actually happen, and roughly how long they take, we have summarised the general steps below.
Step 1: Discovery & Matching
Like any deal, the process starts with the interested parties discovering and connecting with each other. This could be facilitated via various channels like private marketplaces, discoverability platforms (e.g. Bulletin) or brokers & specialised investment banks (such as web3 Studios). Discovery & matching is oftentimes the most difficult and lengthy part of the process, as the pool of interested parties is still relatively limited and fragmented across various different user groups (e.g. VCs, family offices, employees, angels, etc.) and geographies.
Timeline → Very variable; anywhere from a few days to months to identify interested parties and establish initial contact.
Step 2: Negotiation
Next, the buyer and seller enter negotiations to determine the terms of the transaction - i.e. amount, price, structure (SPV, direct, forward contract, etc.) and any other considerations. If you have done a good job at matching the parties and everyone is on the same page then this part should be smooth. Nonetheless, many deals still fail at this stage as the parties cannot come to an agreement.
Timeline → Few days to weeks; depends on the complexity of the transaction, rounds of discussion and responsiveness of the parties involved.
Step 3: Company Approval
Once the buyer and seller agree on the terms, the issuing company, whose shares/tokens are being traded, needs to approve the transaction. This is to ensure compliance with any applicable laws, regulations, terms in the shareholder agreement or internal policies. The issuing company will likely also need to conduct due diligence on the buyer to ensure their suitability as a shareholder.
One of the key requirements of this step is to obtain a waiver on the aforementioned ROFR. The main risk is that the company decides to exercise its ROFR (i.e. it buys the shares at the agreed terms, which is still a good outcome for the seller) or they decide to withhold approval of the sale. This could be for various reasons such as not being happy with the terms of the sale (e.g. a down valuation) or simply not wanting to set a precedent for other LPs.
It helps a lot here if either or both of the parties have a good relationship with the founders of the company, and oftentimes it is advised to make them aware of your intention to sell prior to engaging in conversations with buyers or brokers. You will have a much smoother sale if you have them on your side and they may even be able to help you find a suitable buyer, which can save you a lot of time and money.
Having said that, there are ways by which some parties circumvent the approval process/ban of the issuing company. This is frequently done by holding the shares/tokens via a special purpose vehicle (SPV) and selling ownership shares of that SPV, or by using forward contracts
Timeline → Few weeks to months; depends on the responsiveness of the issuing company, KYC checks and frequency of board meetings (as the board will sometimes need to sign-off on stock transfers)
Step 4: Legal Review & Execution
Once there is sufficient indication that the issuing company will not block a sale, the parties engage their respective legal counsel to draft and complete the necessary documentation, such as the share / token purchase agreement (SPA / TPA) or a stock transfer agreement. These documents outline the terms of the transaction, including warranties, representations, and any specific conditions. Once both parties are satisfied with the final version, they are executed and legally bind the buyer and seller to complete the sale.
Timeline → Few days to weeks; depends on whether boilerplate legal documents are used or if more bespoke agreements are needed given the complexity of the deal, plus the responsiveness of the legal teams involved.
Step 5: Payment
After the documents are executed and the issuing company has signed-off on the sale, the buyer proceeds with the payment. This can be done through wire transfer, on-chain transfers, escrow services, or other agreed-upon methods. The payment is typically made to an account/wallet specified by the seller.
Timeline → Few days
Step 6: Registry Updates
Following the completion of the payment, the parties notify the issuing company who in turn notify the registrar or transfer agent responsible for maintaining the company's shareholder records. This notification allows the transfer agent to update the ownership details and record the buyer as the new shareholder. In the case of unvested tokens this naturally also means an update in the receiving wallet address.
Timeline → Few days to a couple of weeks
The full report can be accessed → here