There are two matters to consider when discussing the Secondary Markets as a liquidity option. First, you want to be sure the business your client is working with is FINRA registered and second, you should note the distinction between the two types of firms; Matching Companies and Auction Companies.
Why is it important to work with a FINRA registered firm?
As a registered representative, you are required to pass multiple licensing exams, sit through annual compliance reviews, audits, continuing education, and more. All of these activities cost you time and money, but are a necessary evil. They keep you up to date, informed, and in compliance so you may continue to do business while providing protection to investors.
If you are going to assist your client with the sale of a non-traded REIT or limited partnership, you are required to work with a FINRA registered firm and would need to consult with your broker dealer prior to doing so. If you are simply referring a client, or dare we say ex-client, wouldn’t you want them to have those same protections?
Thankfully, there are more than half a dozen Secondary Market firms registered with FINRA and if you check The DI Wire daily for the next week or so, you will learn about a new company each day.
How do I choose the right firm to work with?
First and foremost, it is important to understand how the Secondary Market firms differ. As mentioned earlier, there are two types; Matching Companies and Auction Companies. First, let’s learn about Matching Companies.
Matching company representatives are much like real estate agents. They act as agents, matching a willing seller with a willing and able buyer. Typically, these firms have a list of buyers, sometimes several hundred, which have expressed interest in certain partnerships.
Once a seller contacts the matching company, a registered representative of the firm (remember, they are affiliated with a broker dealer) will reach out to a minimum of three buyers for offers. Sellers could have a bid the very same day they initially offer their shares for sale. Once the seller accepts an offer, the Matching Companies begins the transaction and typically manages the entire process to closing.
For sellers wishing they could sell their non-traded REITs and limited partnerships on EBAY, Auction Companies may be the answer as they allow sellers to list shares for buyers to bid on. It works just as a typical auction with a reserve price and offering period set. Buyers make offers and once the highest bid is at or above the reserve price, the Auction Company initiates the trade, and like the Matching Companies, manages the transaction from start to finish.
When considering which Secondary Market Company type and firm to work with, it is important to do your research and interview each of these firms as there will be differences. Matching Companies will differ from firm to firm just as Auction Companies will differ from one another. Sellers should certainly ask, among other things, how many ready buyers the firm has.
Despite which firm type you work with, there are fees. Sellers and buyers should be sure to ask what costs they are responsible for. In addition to transaction costs being relatively the same, the process, for the most part, is as well.
Lastly, keep in mind no matter which type of company you work with, the sponsor must approve the sale and new buyer, then process the paperwork to complete the transaction.
Tomorrow, we will highlight the first of the Matching Companies in a “Who is?” feature article.