Facebook’s (FB) 2012 stock market debut kicked off a boom in U.S. initial public offerings and in the process undercut a Wall Street fad the company helped popularize: private share exchanges. SecondMarket and SharesPost, which allowed early investors and employees of closely held companies to sell shares, wound down their exchanges when Facebook insiders no longer needed the services and companies such as Twitter (TWTR) and Square restricted their use. Now Nasdaq OMX Group (NDAQ) Chief Executive Officer Robert Greifeld hopes to succeed where these other private exchanges failed.
Greifeld is awaiting clearance from the U.S. Securities and Exchange Commission to open Nasdaq Private Market, a San Francisco-based exchange for trading shares in private companies. Nasdaq’s chief, who has tapped SharesPost as its partner in the venture, is counting on the 2012 Jumpstart Our Business Startups Act to drive business to the new market. Under the federal legislation, companies don’t have to start revealing their revenue, profit, and other financial information until they have 2,000 shareholders, excluding employees. The threshold used to be 500, including employees.
The JOBS Act could persuade more startups to remain private, Greifeld said at a conference in December, an attractive proposition for those that want to avoid the burdensome paperwork and expense of a public listing and the constant scrutiny of analysts and investors. Nasdaq is pitching its new exchange as a way for private companies to let workers cash out some of their shares rather than being forced to wait for an IPO or an acquisition. “From an employee perspective, it means there’s a light at the end of the tunnel when it comes to being able to capitalize on your sweat equity,” says Breck Hancock, a partner at law firm Goodwin Procter.
Nasdaq’s private market could be up and running by March if SEC approval comes through this month, says Greifeld. The timing isn’t exactly propitious. A robust IPO market is giving startups and large, closely held businesses more incentive to go public. Last year 211 companies staged IPOs in the U.S., the most since 2007, according to data compiled by Bloomberg. To succeed, Nasdaq Private Market will have to persuade companies to forgo the lure of big payouts and the brand recognition that comes with a ticker symbol.
Another potential obstacle is the reputational hit Nasdaq suffered over its handling of the Facebook 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. The New York Stock Exchange (ICE) has profited from its rival’s troubles: NYSE hosted 22 of the 37 U.S. technology and Internet IPOs in 2013, Bloomberg data show.
Nasdaq may be trying to elbow its way into a market where it’s not needed. 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, a broker-dealer and research firm. A lot of that activity involves startups working directly with institutional investors to arrange deals where backers, and in some cases employees, could cash out a piece of their holdings. That’s one reason business dried up for the smaller private markets. (SecondMarket now facilitates trades in other types of illiquid assets.) Companies that have arranged such transfers in the past year include SurveyMonkey, Kabam, and Square. “The best companies don’t need this exchange, and the bigger institutional investors don’t need a middleman,” says Lise Buyer, a former Internet analyst who now runs Class V Group, an IPO consultant.
In November, Lending Club orchestrated the sale of $57 million worth of its shares held by early investors. The buyers were DST Global and Coatue Management. The deal was struck in two phone calls, Renaud Laplanche, CEO of Lending Club, 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.”
Kent Wakeford, chief operating officer of Kabam, a San Francisco-based mobile and online game developer that has held discussions with Nasdaq, says the new private market 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,” he says. “That demand with a restricted supply can have the benefit of increasing the valuations and amounts people are willing to pay.”