Private share markets where corporate insiders can cash out stakes while avoiding the scrutiny of public listings have seen their popularity wane. Nasdaq OMX Group Inc. has a plan to make the concept mainstream.
The second-largest operator of U.S. equity exchanges is awaiting clearance from securities regulators to start Nasdaq Private Market, a service that would allow closely held firms to give investors and employees a way to sell shares without the strictures of an initial public offering. A barrier was loosened in 2012 with the Jumpstart Our Business Startups Act, which quadrupled to 2,000 the number of shareholders a company could have before it needed to disclose financials.
Chief Executive Officer Robert Greifeld is betting the law will help him to succeed where others didn’t. SecondMarket Inc. and Nasdaq partner SharesPost Inc. rose to prominence in 2010 and 2011, helping spur a surge in Facebook Inc. (FB)’s valuation before it ever went public. Both have since wound down their exchanges as IPOs revived and companies such as Twitter Inc. (TWTR) restricted their use.
“From an employee perspective, it means there’s a light at the end of tunnel when it comes to being able to capitalize on your sweat equity,” said Breck Hancock, a New York-based partner at law firm Goodwin Procter LLP. “From an investor perspective, it’s a means to get into companies that don’t need your money.”
Nasdaq Private Market needs U.S. Securities and Exchange Commission approval to open, though Nasdaq this month got the Financial Industry Regulatory Authority’s clearance to form a related broker-dealer subsidiary.
While exchange-based trading for private companies has dried up, Nasdaq does face a growing market with CEOs seeking to give employees a way of getting cash for their equity stakes. Transactions involving sales by employees and shareholders jumped 51 percent last year to a record $12.4 billion and may rise 56 percent this year to $19.3 billion, according to Nyppex LLC, a New York-based broker-dealer and research firm.
Nasdaq’s plan faces headwinds, including a robust IPO market that’s giving startups and large, closely held businesses more incentive to go public. Last year, 211 companies went public in the U.S., the most since 2007, according to data compiled by Bloomberg. The Bloomberg IPO Index of newly trading companies surged 48 percent in the past year, beating the Standard & Poor’s 500 Index’s 20 percent gain.
To succeed, Nasdaq Private Market must persuade more companies to forgo the rewards of being public, such as the lure of greater riches and the brand recognition that comes with a ticker symbol. And only accredited investors -- such as large institutions and wealthy individuals -- will be eligible to buy stakes, limiting the pool of potential shareholders.
New York-based Nasdaq is trying to elbow its way into a market where it may not be wanted. In 2011, companies including Twitter, Square Inc. and LivingSocial Inc. started barring investors from selling stock on secondary exchanges like SecondMarket and SharesPost in order to cap the number of shareholders and keep sensitive financial information from reaching too many people.
Greifeld is getting help entering the business, creating a joint venture last year with SharesPost, whose founder Greg Brogger will run the new platform. Between January 2011 and March 2012, San Francisco-based SharesPost handled transactions involving shares of Facebook, TrueCar Inc., LinkedIn Corp. and Twitter, according to its website.
In a statement announcing the venture in March, Nasdaq and SharesPost said the new venue “will provide improved access to liquidity for early investors, founders and employees while enabling the efficient buying and selling of private company shares.”
Nelson Griggs, the senior vice present of Nasdaq’s global client group, said his firm wants to give closely held companies more flexibility.
“Nasdaq Private Market will allow private companies complete control over their equity management plans,” Griggs said during an interview. “The goal is to reduce costs and other administrative complexities that are associated with managing equity ownership.”
Nasdaq is expanding as the exchange repairs its reputation among technology companies. The bourse was at the heart of Facebook’s IPO, which gained as much publicity for trading malfunctions as for its $16 billion size. Facebook shares lost half their value in the months that followed the May 2012 offering and didn’t top the IPO price until August 2013.
While Nasdaq’s public stock market is home to thousands of companies including Apple Inc., Google Inc. and Microsoft Corp., the exchange was trumped last year by its main rival, the New York Stock Exchange. The NYSE hosted 22 of the 37 U.S. technology and Internet IPOs in 2013, headlined by Twitter’s offering, data compiled by Bloomberg show.
The JOBS Act could persuade more companies to remain private, Greifeld said at a conference in December. Because of the legislation, companies don’t have to start revealing their revenue, profit and other financial information until they have 2,000 shareholders, and employees aren’t counted. It used to be 500, including employees. Once a company is forced to disclose financials, the pressure to list shares publicly at the NYSE or Nasdaq Stock Market mounts.
“That change in the JOBS Act means essentially that a private company can stay private forever,” Barry Silbert, the CEO of New York-based SecondMarket, said during an interview.
For companies seeking to raise capital, there’s no shortage of available funds, making Nasdaq Private Market’s pitch to startups potentially less persuasive. Private equity firms, hedge funds and mutual fund companies have all opened their wallets to the hottest companies, allowing them to raise funds with just a few phone calls.
In the past year, SurveyMonkey Inc., LendingClub Corp., Kabam Inc. and Square have worked directly with institutional investors to arrange deals where backers, and in some cases employees, could cash out a piece of their holdings. Those deals didn’t require an intermediary like Nasdaq, because institutional investors are lining up to offer cash to emerging companies, big and small.
“The best companies don’t need this exchange, and the bigger institutional investors don’t need a middle man,” said Lise Buyer, a former Internet analyst who now runs Class V Group LLC, an IPO consultancy in Portola Valley, California.
Venture capitalists invested $8.37 billion into U.S. startups during the final three months of 2013, the highest quarterly total since 2007, according to the National Venture Capital Association. At least 20 private North American technology companies have raised investment rounds of more than $100 million since the beginning of 2013, according to data compiled by Bloomberg.
In November, LendingClub, the largest peer-to-peer lender, orchestrated a sale of $57 million in shares from early investors to DST Global and Coatue Management LLC. The deal was struck in two phone calls, Renaud Laplanche, the CEO of LendingClub, wrote in an e-mail.
“It really wasn’t much effort, and it was all over in less than a week,” Laplanche said. “We have a long-standing relationship with both firms, and they had both expressed their interest in investing in LC before.”
For SecondMarket, staying relevant in the private share market has required a change in business model. In the past 18 months, the company has moved from providing a trading venue to offering technology that companies can use when conducting share sales, Silbert said. SurveyMonkey, an online survey provider, video-game developer Kabam, and payments company Square have all used this service.
“We are not focusing on connecting investors with the companies or these opportunities,” Silbert said. “We are an enterprise software company now. We are providing the entire back end.”
SecondMarket facilitated $100 million in private-company transactions in 2009, the year the marketplace launched, quadrupled that number to $400 million in 2010 and reached about $500 million in 2011. Transactions dried up early the following year, forcing the company to change direction.
SecondMarket’s technology was valuable in Kabam’s recent $38.5 million secondary offering, according to Kent Wakeford, chief operating officer at the San Francisco-based startup.
Wakeford has since held discussions with Nasdaq about the Nasdaq Private Market and said it could be useful for companies given the exchange’s existing relationships with investors.
“Nasdaq has the potential to optimize price by creating demand among a much larger pool of investors,” Wakeford said. “That demand with a restricted supply can have the benefit of increasing the valuations and amounts people are willing to pay.”