Publicly traded shares are the most well-known and liquid form of equity. However, this form only accounts for a fraction of the larger market. The US Securities and Exchange Commission (SEC) research division reported in 2014 that $1.35 trillion was raised through registered offerings of debt and equity (that is, to the public market), while $2 trillion was raised through private offerings.

The benefit of the public market is that it gives constant liquidity for shareholders and easier access to money for the companies. But that liquidity comes at a cost to the company, as it must comply with rules and regulations from securities and accounting regulators, and exchanges. This cost is significant and rising, such that global trends show IPOs are less frequent and coming later in the life of a company.

Regulators, like the SEC, put strict rules on when and how such equity can be transferred. At the core of these regulations is a desire to protect consumers from bad actors and prevent them from finding loopholes to those restrictions. And so the consequence of regulation is severely limited liquidity for shareholders, as their flexibility to sell is restricted. The process of finding a purchaser and transferring equity in the public market is easy. The price is usually set by the market, and brokers are acting all day; buy or sell orders can be executed rapidly. However, the process of finding a purchaser and transferring equity to them in the private market can be almost impossible.

In a prior piece, I wrote about the evolution of representing equity from share certificates to uncertificated shares and, now, to distributed ledgers. One of the features of share certificates is that they come with legalistic restrictions on what can be done with them. These warnings help the owner know what they can do, and tells potential buyers what’s permissible. In short, this equity is not very liquid.