BY DARA ALBRIGHT
I just read a fascinating article depicting how decimalization has caused the demise of the small cap IPO market and how the customization of spreads could provide a potential solution. If allowing issuers to determine their own trading spreads could improve the functionality of the public markets, I can only imagine the impact it would have on the unfettered private markets.
Those who have been following my work know that I am a strong advocate for utilizing hindsight to reconstruct the damaged capital markets. As a new ecosystem unfolds, with the private company marketplace (PCM) rising to fill the capital formation void left behind by NASDAQ, there has never been a more opportune moment to work with a clean slate and institute protocol based on the previous successes and failures in the capital markets.
The frenzy to own Facebook stock has inspirited an entire subculture of private share brokers trying to get in on the action and capture wider spreads. And nothing incentivizes a stock salesman more than a wide spread. I believe that the ample spreads in the PCM, coupled with a developing infrastructure that includes research, greater transparency, certificate tracking, settlement and clearing functions, will motivate brokers to get behind lesser known private companies and propel this new marketplace to astonishing new heights. Much like the NASDAQ, also once known for its more generous spreads, did more than 40 years ago when it provided orderliness and clarity to the fragmented and obscure OTC marketplace.
As its procedural framework and back office system matures, a typical private company secondary transaction will no longer proceed as follows:
From: Broker #1 [mailto:email@example.com]
Sent: Thursday, May 05, 2011 12:33 PM
To: EVERYONE IN MY OUTLOOK
Subject: Facebook Shares
I am representing a seller of 50M shares of Facebook. Anyone interested in owning a piece of the greatest company ever incorporated?
From: Broker #2 [mailto:firstname.lastname@example.org]
Sent: Thursday, May 05, 2011 12:34 PM
To: Broker #1 [mailto:email@example.com]
Subject: Re: Facebook Shares
I have a buyer that would be very interested. Call me on my cell right away at 555-867-5309 (yes, this is my real number)
12:35 PM – The Initial Call:
Broker#1 – Hi, I am following up on your email regarding the Facebook shares.
Broker#2 – Wait, before we go any further you need to know that my side won’t take less than $1 per share
Broker#1 – Well then my side needs $1 per share too. Your side is not getting more than my side. My side would rather walk away and get paid nothing than see your side get more than my side.
Broker#2 – Well my side is not getting less than your side. My side would also rather go back to capturing penny spreads in the public markets than see your side get more than my side.
Broker#1 – My side is so much better than your side.
Broker#2 – Well my Dad is way bigger than your Dad.
Broker#1 – Let’s take a step back from discussing spreads. How about you tell me about your buyer?
Broker#2 – No, first you tell me about your seller. I need to make sure he’s real.
Broker#1 – No, first you tell me about your buyer. I need to make sure that he is real.
Broker#2 – Oh, my buyer is real alright. In fact, he is real and he is spectacular.
Broker#1 – Well my seller is real too. We have a very close relationship. The seller came to me through my 3rd cousin who went to sleep-away camp with Mark Zuckerberg’s great aunt’s grandson’s cousin’s daughter’s best friend’s brother.
Broker#2 – Well my buyer is very rich.
Broker#1 – Is your buyer based in the U.S.?
Broker#2 – No. He is overseas. He is the richest man overseas. In fact, he is the richest man on the planet. Actually, he is the richest man in the universe. His money is based in an off-off-shore account. Actually, it’s held in an off-galaxy account. But he is very real and very motivated to own Facebook stock. He’s so rich he even has his own space ship.
Broker#1 – But can your rich buyer produce proof of funds?
Broker#2 – He can if your seller can produce a copy of the certificate. Have you seen a copy of the certificate?
Broker#1 – Yes. It is very real. It’s so real that even Donald Trump would authenticate this certificate. But I won’t produce a certificate until I see proof of funds.
Broker#2 – Well I won’t produce proof of funds until I see a certificate.
Broker#1 –Why don’t we just get the seller and buyer on the line and have them speak to each other directly.
Broker#2 – Sounds good. How about you call me back in an hour with the seller and I will conference in the buyer.
ONE HOUR LATER
The Conference Call:
Broker#1 – Hi everyone, I’d like to introduce Broker#3 who represents the seller
Broker#2 –I’d like to introduce Broker#4 who represents the buyer
Broker#3 – Well, actually I am friends with the broker who represents the seller
Broker#4 – Well, actually I sang in the glee club in elementary school with the wife of the broker who represents the buyer. We all reconnected recently through Facebook.
Broker#1 – How about Broker#3 and Broker#4 patch in the actual seller and buyer
TEN MINUTES LATER
Broker#1 – Okay, who do we have on the call?
Broker#2 – Broker#2 here
Broker#3 – Broker#3 here
Broker#4 – Broker#4 here
Broker#5 – Broker#5 here
Broker#6 – Broker#6 here
Broker#7 – Broker#7 here
Broker#8 – Broker#8 here
Broker#9 – Broker#9 here
Broker#10 – Broker#10 here
Broker#11 – Broker#11 here
Broker#1 – Is there an actual seller or buyer on the line?
Broker#11 – whkhjkgfjsgfujkdfgjkdgbjdk
Broker#1 – can you repeat that?
Broker#11 – whkhjkgfjsgfujkdfgjkdgbjdk
Broker#4 – Can anyone hear what that guy is saying? Hello. Hello. Hello. I can’t hear anyone. Can anyone hear me? Papa, can you hear me? Papa, can you hear me?
Broker#10 – Is someone singing a Barbara Streisand song?
Broker#2 – I can barely hear Broker#11. I think there are just too many people on this conference line.
Broker#3 – What? What? What?
Broker#5 – Can someone remind me why we are even on this call?
Broker#4 – What’s the damn spread? What’s my share? I need to make at least 60 cents so I can pay the guy who taught me how to log on to the Internet and sign up for the Facebook account that enabled me to be introduced to the husband of the wife I sang with in glee club.
Broker#6 – Yeah, what’s my cut? I’ve got people to pay too.
Broker#7 (SCREAMING) – Okay, I am taking the lead. This deal won’t get done if the spread is over $1. I say everyone gets 10 cents except for the broker singing Streisand and the other guy who is having trouble hearing. Those two will get 5 cents. My rich alien buyer wants to buy the 50M shares right now. The funds are in escrow on the planet Zorbithon in a private bank that has no exposure whatsoever to European debt. Once my rich buyer finishes learning English with Rosetta Stone, he will review and sign the stock transfer document. Since he is so rich it won’t take him very long to learn a new language. We’re gonna get this deal done!
TWO MONTHS LATER
From: Broker #10 [mailto:firstname.lastname@example.org]
Sent: Thursday, September 20, 2011 2:33 PM
To: Broker#1, Broker#2, Broker#3, Broker#4, Broker#5, Broker#6, Broker#7, Broker#8, Broker#9, Broker#11
Subject: Facebook Transaction
I just learned that this transaction has been ROFR’d. Apparently, Facebook feels uncomfortable about having an extra terrestrial on the cap table.
Disclaimer: All characters appearing in this article are fictitious. Any resemblance to real persons or aliens, living or dead, is purely coincidental. No brokers were harmed while writing this article.
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