During Southeast Asia’s fundraising boom, oversubscribed rounds were common and later-stage investors often wanted larger allocations than primary rounds could accommodate. Secondary share sales were sometimes the answer. Now, funding continues to stall, companies have reached meaningful scale, but exits remain limited. In this environment, secondary share sales can remain an important tool, but instead of providing early liquidity to investors before a full exit.

What is a secondary sale?

A secondary sale occurs when existing shareholders sell some or all of their shares before the company has a full exit. This differs from a primary issuance, where a company issues new shares and receives the investment monies.

A secondary sale is legally a transaction between selling shareholders and the buying investor. The company is not a direct party, but it is almost always involved because:

• Transfer restrictions in shareholder agreements are common.
• Board approval is often required.
• The company may need to address the liability gap (explained below).
• Governance rights may need to be updated after early investors sell down.

The liability gap

Secondary sales often occur alongside a new funding round, especially when the round is oversubscribed or existing shareholders want to avoid further dilution. This blended structure creates additional legal and commercial complexity. The liability gap is one of the most important issues in a secondary transaction.

By way of example, incoming investors commit US$30 million to a company:

• US$10 million goes into the company (primary issuance).
• US$20 million goes to early investors (via the secondary).

If the entire US$30 million had been a primary issuance, the company would typically be liable for warranties to investors up to the full amount.

Also Read: Do you need to rethink your startup fundraising strategy?

But in a mixed deal, the company only receives US$10 million, while selling shareholders receive the other US$20 million. Those sellers, especially VCs, are unlikely to take on full business warranties for the US$20 million of shares being sold. Institutional investors selling shares often only give title and capacity warranties, not full business warranties.

A liability gap, therefore, emerges between what the incoming investors expect and what sellers are willing to cover. This is usually resolved in the following ways:

• Incoming investors accept reduced warranty coverage.
• The company agrees to cover some exposure, even though it only received part of the funds.
• Investors rely on the commercial reality that large warranty claims are rare and accept the lower coverage.

Restrictions and governance implications

Companies undertaking a secondary transaction will have governance documents in place – shareholders’ agreements, constitution, etc. These typically include rights of first refusal (ROFR), tag‑along/co‑sale rights, and board or shareholder approval requirements. Almost certainly, a series of waivers will be required before a secondary sale can proceed alongside the approvals for the fundraise.

Also Read: Mastering the art of fundraising: Winning strategies to engage investors

If an early investor sells down significantly, the company may also need to revisit items such as board representation, veto rights, reporting rights and other investor rights. These rights may no longer be appropriate for a shareholder with a much smaller stake.

Different share classes and liquidation preferences

Cap tables often involve multiple share classes with different rights. When an incoming investor acquires shares through both primary and secondary transactions, they may end up with:

• A new class of preferred shares (from the primary issuance), and
• An older class, which may even be ordinary shares (purchased from existing shareholders).

If the investor wants identical rights across all of their shareholding, especially liquidation preferences, the company may need to consider reclassifying shares or buying back shares and reissuing the new class to align their rights.

In conclusion

Secondary sales are already a feature of Southeast Asia’s startup ecosystem, providing some liquidity when a full exit is still far off. But they also introduce complexity, with transfer restrictions, warranty and liability allocation, governance matters, and share‑class alignment all needing careful consideration.

—

Editor’s note: e27 aims to foster thought leadership by publishing views from the community. You can also share your perspective by submitting an article, video, podcast, or infographic.

The post Secondary sales in SEA: The liquidity lifeline when exits are scarce appeared first on e27.