When a company’s securities are “illiquid,” it means that investors in that company cannot sell the securities they own in that company to get their cash out of the investment (even at a loss) whenever they want to. They have to wait for either a “liquidity event” like a company sale or IPO, or find a willing buyer on their own. This makes the investment riskier than typical investments in publicly salable securities such as stocks sold on the NYSE or NASDAQ markets, registered mutual funds, or similar investments where there is a ready market for the securities.
A company may be illiquid because the sale of its shares is not allowed under applicable securities laws. It may also be illiquid because there is no active market where the shares are bought and sold on a regular basis. Whatever the reason, buying and selling shares in an illiquid company is more difficult than what most investors are accustomed to.
Liquidity is significant concern for startup investors because, for many startup companies, a public market for their securities never develops. Therefore, investors in the company are sometimes unable to sell their securities or receive any return on the investment prior to the company’s liquidity event.
Since venture capital investments can take several years to yield a return, investors in these securities must be prepared to hold the securities for a long time. This means that investors in illiquid securities must have sufficient other assets that are liquid to meet their financial needs. If you are considering an investment in iSelect Fund, you should work with your financial advisor to determine an appropriate allocation of illiquid securities based on your unique financial needs and portfolio of investments.
