Private Stock Markets and Investor Relations

Posted by on April 29th, 2013

NASDAQ made headlines in March when it entered into a joint venture with SharesPost to create the NASDAQ Private Market (NPM), an exchange where investors can buy and sell the shares of privately-held companies.  NPM is not the first private stock market.  In fact, SharesPost and its main rival, SecondMarket, have offered similar platforms since 2009.

SharesPost and SecondMarket created the platforms in response to the increased demand from the shareholders of high-tech startups, many of whom were current and former employees, to cash out of their positions.  The platforms, which are registered broker-dealers, have a very traditional business model.  They connect a buyer with a seller, and then collect a commission for their work.

The difference is the companies that are listed.  The private markets specialize in trading late-stage, venture capital-backed companies that are either too small or just aren’t ready for a traditional IPO.  The exchanges not only provide sought-after liquidity, but give individuals and institutions opportunities to invest in companies they might not otherwise be able to.

What made the NASDAQ deal so interesting was that it marked the first time a major exchange has entered the private stock market arena.  On its face, it seems counterintuitive that NASDAQ would want to do anything to discourage companies from going public.  After all, NASDAQ benefits from new companies joining its ranks in the form of listing fees and increased volume.

Instead, NPM may be an acknowledgement by NASDAQ that it must find new ways to grow as equity volumes stagnate and a sluggish economy coupled with increased regulation discourage companies from going public.

The market for private companies remains small.  Greg Bogger, CEO of SharesPost, estimates 100 private companies permit trading.  But with the passage of the JOBS Act—which quadrupled the maximum number of shareholders a company can have before it must go public to 2,000—a growth opportunity exists as companies wait longer before going public.

Private markets also pose growth opportunities for investor relations firms, who can adapt their knowledge and expertise in working with public companies to helping private companies achieve their goals.

As companies begin to expand their shareholder base beyond employees and the consortium of VCs that made direct investments, it will become crucial for them to build out their investor relations infrastructure not only to keep new shareholders up-to-speed but provide potential investors what they need to make an informed decision.

While private companies won’t have your traditional investor relations website, increasing transparency by creating a password-protected data room (or using SecondMarket’s and SharePost’s Web sites)  to upload materials such as PowerPoint presentations, fact sheets and conference calls will be essential in increasing liquidity and helping the company achieve a fair valuation.