Nasdaq OMX Group, Inc. announced today that it will enter into a joint venture with SharesPost, Inc. to form a marketplace for the trading of shares of unlisted companies. This is an interesting and cutting edge move that solves some problems for both Nasdaq and SharesPost. This new marketplace should be very positive for rapidly growing and large private companies which want to allow some trading in their shares but which are not ready to become publicly traded companies. It will also give investors opportunities to buy the shares of large private companies before the shares of these companies become publicly traded. According to a Nasdaq press release issued today this new marketplace, which will be called The Nasdaq Private Market, will “provide improved access to liquidity for early investors, founders and employees while enabling the efficient buying and selling of private company shares”.
Nasdaq will own the majority of and will control this joint venture, but the joint venture will use SharesPost’s existing trading platforms and infrastructure. The joint venture will be run by SharesPost founder Greg Brogger. Depending on the speed of regulatory approval, this new market for unlisted shares could be operational later this year.
This move makes good sense for Nasdaq because it should help them to begin to rebuild their credibility with up and coming companies and the technology industry. These market segments have traditionally been Nasdaq’s strength, but Nasdaq has been losing company listings (even from technology companies) to the NYSE and other exchanges. Nasdaq’s problems in attracting new technology company listings may be due to the significant negative issues that occurred in the initial public offering of Facebook’s shares last year. Nasdaq took a huge hit to its credibility as it was roundly blamed and criticized for the technical glitches that occurred with the Facebook offering. Some estimates say that major market makers and broker dealers lost more than $500 million in the Facebook IPO because of Nasdaq’s technical glitches. Nasdaq will also soon feel the economic effects of this matter as it reportedly offered as much as $62 million to settle associated claims and it now faces a possible $5 million fine from the SEC. For a good discussion of the current status of Nasdaq’s Facebook offering woes, see Charlie Osborne’s post on ZDNet.
This new relationship should also be very beneficial to SharesPost. SharesPost, which began operations in 2009, experienced substantial success in facilitating trading of shares of unlisted companies. The company provided the platform for trading in unlisted securities of high visibility technology companies such as LinkedIn and Facebook before these companies’ securities became publicly traded. SharesPost eventually encountered regulatory scrutiny, however, and the SEC brought an action against the company for failure to register as a broker dealer in connection with the offerings of securities being conducted in the SharesPost marketplace. You can read the SEC’s Cease and Desist order for a good summary of the history and operations of SharesPost and the SEC’s concerns. SharesPost and Mr. Brogger eventually resolved this matter by instituting appropriate broker dealer registration and paying a fine. This new venture with Nasdaq will give SharesPost more credibility in the increasingly crowded market for trading of unlisted shares.
The timing of this new venture seems impeccable. There is a significant degree of investor interest in acquiring the shares of large private companies in anticipation of a later IPO. Many of these companies are very high profile technology companies (such as Groupon, Facebook and LinkedIn before their IPOs) that generate much investor anticipation. This new marketplace should find a high degree of acceptance from investors.
Many large private companies appear to want to remain private to avoid the administrative and cost burdens, the potential liability and the lack of flexibility that public company status brings, and this new marketplace should facilitate staying private. Certain provisions of the JOBS Act will also allow growing companies to remain private longer, and this should also help this new marketplace to succeed. The JOBS Act provides that certain companies can remain private up to the point where they have 2,000 shareholders (1,500 of whom must be accredited investors under Regulation D standards; this total number is up from the prior limit of 500 shareholders), and I believe that many large private companies (especially in the technology space) will use this provision to remain private longer. The presence of an efficient, credible marketplace for the unlisted securities of these companies should also make it easier for them to remain private.
This Nasdaq Private Market will be another positive event for many companies as it should help to provide additional options as they manage their rapid growth. Along with the JOBS Act, this new marketplace should provide additional opportunities and flexibility for these companies as they evaluate their strategic and corporate finance alternatives. I hope that the regulatory agencies see the potential value that this new marketplace offers and expedite their approval processes.