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Nasdaq to Open Private-Company Trading

Platform for Pre-IPO Companies

Written by Brian Hicks
Posted March 7, 2013

In a move to stimulate share trading with a focus on rapid-growth and emergent tech companies, Nasdaq has tied up with SharesPost in a joint venture to move into the market for private companies.

The joint venture will allow for the creation of a marketplace for pre-IPO private companies, thus enabling these private companies' shares to be bought and sold, providing liquidity for early investors, company employees, and founders.

It’s an interesting move, since such private investing has led to astounding (and some would say inflated) valuations on major companies like Facebook, Zynga, and Groupon prior to IPOs, as the Financial Times reports.

Last year’s Jumpstart Our Business Startups (JOBS) Act made it easier for newly-growing companies to raise capital within the U.S., and the present agreement is clearly part of the new competition: in what new ways can private company shares be traded? The JOBS Act increased the maximum number of shareholders in a private company from 500 to 2,000.

The NYSE also presents some stiff competition to Nasdaq when it comes to new technology listings. Last year, the NYSE saw 17 tech and related company listings, compared to Nasdaq’s 20; that makes 2012 the second straight year when the two indexes were so close to each other, the Financial Times reports.

And now, as Nasdaq faces an $8.2 billion merger with the Intercontinental Exchange, the index has avowedly decided to steal what it can off NYSE Euronext’s listings, so the more tech companies that move to Nasdaq, the better. Under the new agreement, Nasdaq will likely find it easier to attract tech companies, thus paving a way toward the public market.

SharesPost is a marketplace and information hub for private company stocks that also handles trades for investors like a broker-dealer. The company was founded back in 2009.

Now, SharesPost’s marketplace operation will transform into the Nasdaq Private Market. The brokerage operations remain separate. The combination of Nasdaq’s market and operations base with SharesPost’s online platform should help link up investors with venture-backed companies aiming to go public and their shareholders.

From the Financial Times:

“We’re trying to bring a solution that allows companies to bring liquidity to their early investors and employees,” said Bruce Aust, executive vice-president at Nasdaq.

As evidence of how important a role SharesPost could play, consider that prior to Facebook’s IPO, nearly all of its $80 billion-plus valuation came through private marketplaces like SharesPost and similar platforms.

By the same token, however, private marketplaces have attracted SEC scrutiny due to the disparity often seen between pre- and post-IPO performances. In part, it is because the lack of trading volume can lead to the creation of price bubbles—as in the cases of Facebook (NASDAQ: FB), Zynga (NASDAQ: ZNGA), and Groupon (NASDAQ: GRPN).

SharesPost needed to settle an SEC claim in regards to Facebook, although it wasn’t a very serious issue; the allegation was that SharesPost ought to have applied for broker-dealer licensing earlier.

The new marketplace will be a fairly exclusive playing ground, however; traders must have a net worth of $1 million excluding their residence, or have a yearly income of or over $200,000.

The new arrangement is set to be wrapped up by the end of the year, with SharesPost founder Greg Bogger leading the operation. After regulatory approval, which per Bloomberg is expected later this year, operations will begin in late 2013 and will be based in San Francisco. However, no details regarding the deal were revealed, except that Nasdaq will continue to retain a majority stake in the joint venture.

Nasdaq’s goal is clear. MarketWatch quotes Bruce Aust of Nasdaq:

"By combining our resources, expertise and reach with SharesPost's established technology, we will bring scale, efficiency and transparency to this marketplace."

In recent years, Nasdaq has sought to expand the scope of its business operations drastically, with a view toward cutting its dependence on trading activity, which can often be quite volatile.

Last December, Nasdaq paid $390 million to acquire Thomson Reuters’ investor-relations, public-relations, and multimedia-services units in an effort to boost its corporate solutions business. And then in January this year, Nasdaq reported Q4 profits, in a clear sign that its efforts to revamp operations were, at least to an extent, successful.

As of Tuesday, Nasdaq closed at $32.45, with the stock up 37 percent overall over the last three months.

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