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In the past year, SecondMarket has thrived by enabling investors to buy and sell shares of hot tech companies that aren’t yet listed. With many of the most sought-after companies such as Facebook and Yelp (YELP) going public, it has set its sights on trading shares in a far less trendy sector: community banks.
Early last spring, Chief Strategy Officer Jeremy Smith and Senior Vice President Caryn Feinberg started looking for new growth and zeroed in on trading the shares of small, private banks with secure and stable business models. “There’s something to be said for the 100-year-old bank that isn’t going anywhere,” says Feinberg, who’s heading the new effort. She says small banks want to make it easier for shareholders—often board members and local business-people—to trade their illiquid shares.
Since 2009 more than $1 billion in shares of private company stock have changed hands on SecondMarket’s online trading platform. Since the Securities and Exchange Commission doesn’t oversee private companies, only accredited investors deemed savvy enough to understand the risks on their own are allowed to trade. Under securities law, that includes institutional investors and individuals who make $200,000 a year or have at least $1 million in net worth. SecondMarket allows trades only in companies that it has signed up. It hopes to attract four to six banks to a pilot program and says the boards at five banks are close to signing on.
Demand for shares in Internet startups has been frenetic given the pumped-up valuations for social network sites. Community banks are on a “different planet,” says David Moore, managing principal of Marathon Capital Holdings, which invests in small lenders. He says many private community banks aren’t focused on investor returns. “Most of these tech companies already have governance provisions that mirror public companies, and most private banks do not,” he says.
SecondMarket thinks investors will be attracted to community banks that deliver reliable dividends or are takeover plays in an industry that’s consolidating. Nationwide there are about 6,000 private community banks with less than $1 billion in assets, estimates Chris Cole, senior vice president at Independent Community Bankers of America. SecondMarket requires that a bank have more than $250 million in assets, at least 75 shareholders, and healthy capital ratios to trade on its exchange.
“Up until now, there’s been no choice: either you’re public or you’re not,” says Frank Sorrentino III, chairman and chief executive officer of North Jersey Community Bank. “I think SecondMarket fills a void to remain private but have some liquidity.” He says that if an investor wants to sell, regulations prevent bank executives from brokering deals or pricing the shares.
SecondMarket says making shares more liquid will help banks attract investors and solve a bigger problem that’s plagued the industry after more than 350 banks have failed since 2008: the difficulty raising new capital. Cole says that while making it easier to trade shares may help, investors are “still leery about any kind of local investments.”
The bottom line: SecondMarket hopes online investors will be attracted to the shares of unlisted community banks as takeover and dividend plays.