In case there was even a shred of doubt left, the Facebook IPO validates just how dysfunctional the public markets have become. Not to mention greed infested and corrupt. Was it really necessary for Morgan Stanley to inform its institutional clients during Facebook’s road show that it was cutting its estimates while simultaneously raising the price and size of the offering?

Does anyone sympathize with the weeping hedge fund manager who lost $100M by trying to flip FB on the open?  This same hedge fund “woulda” quintupled its money had its manager read Lou Kerner’s Facebook report on SecondShares in March 2010 that placed a $100B price target on Facebook when it was valued at a mere $19B.

There were plenty of investors who profited handsomely off Facebook. They just weren’t able to do it trading in the treacherous public markets. The fact is the appreciation was realized by investing in the PRIVATE markets. I guess I really need to show the following chart yet again.

Instead of flipping what was touted to be a hot IPO, private market investors made money the old fashion way – by buying and holding. Oh the torture, of having to actually keep a stock for more than 30 seconds. Here’s the truth: trading stocks does not create jobs, fuel innovation or foster economic expansion. To the detriment of America’s economy, its public markets have become one giant breeding ground of traders.  

Weeks after the JP Morgan derivative fiasco, the last thing Wall Street needed was another black eye.  But POW! It saddens me to say so, but it was well deserved. Here’s a suggestion: stop creating cataclysmic derivative products, misleading public investors and risking other people’s money. Remember once upon a time, when as a principal underwriter, you took chances bringing young emerging growth companies public – some of which went on to create enormous wealth and even change the world? Perhaps rather than place new issues in the hands of your biggest institutional clients, you can allocate them across an issuer’s greatest supporters – its clients, its customers, its users and its partners.

I am not one to say, “I told you so” but back in December, I pleaded with Facebook to buck the Wall Street establishment and self-underwrite. (Read “How Facebook’s IPO Could Transform the Capital Markets”). It “shoulda” listened – especially after Goldman Sachs completely bungled its private placement in 2011. Facebook “shoulda” utilized a Dutch Auction model and employed a method called Direct Registration where it would have been able to sell its shares directly to its loyal user-base in a much more equitable manner. Facebook’s IPO “shoulda” gone down in history as the catalyst that transformed the capital markets into a level playing field and led us into a new era of the “social stock market” comprised of long-term investors deeply committed to an issuer’s brand.

Twitter, I hope you are paying attention.

In all sincerity, I removed “Coulda, Woulda and Shoulda” from my vocabulary years ago. Rather than harp on what might have been, I prefer to use the mistakes of the past to create a better tomorrow.

As such, Facebook’s IPO should not be viewed as a monumental regret but rather as a “wake-up call” for the nation. This is undoubtedly a “market structure” problem, not a regulatory one. We simply cannot allow high frequency traders and those who are “too big to fail” to run amok with our capital markets. While there are some who will inevitably use Facebook’s IPO debacle to undermine key components of the JOB Act, they will be doing this country a grave disservice. We need to inspire entrepreneurship, not deter it. If they are so inclined to tighten regulation then appropriate it towards those who are destroying the capital markets with useless derivative products and excessive greed. Whatever you do, please do not strangle the emerging businesses who are merely trying to restore economic prosperity through innovation and job creation.

222 days, 5 hours, 54 minutes, 32 seconds until the democratization of the U.S. capital markets.

Instead of skyrocketing, as was widely predicted among analysts on the Street, Facebook closed up a mere $0.23 cents, not even gaining 1%. News circulated during the day that even Facebook’s bankers had to jump in and support the stock from breaking its offering price. A far cry from LinkedIn’s IPO entrance, almost exactly one year ago, which nearly tripled its offering price during its first trading day.

The most anticipated IPO of the decade and largest technology offering in history had a less than stellar IPO debut. Yikes. What does this say about America’s capital markets? What does this mean for its economic future?

If we’ve learned anything today, it’s that timing is everything and no one, not even Wall Street’s finest, can predict the ideal day to go public. Sometimes you just “pick the wrong day to quit amphetamines“. But, bankers can sometimes price an offering correctly. And this was one of those times. Had Facebook’s stock price shot through the roof, Friday’s headlines would have read something like, “Once Again Wall Street Bankers Underprice a Deal & Screw the Issuer”.

Facebook’s underwriters should be commended. But I do not want to give them too much praise for fear it will go to their heads and result in the creation of yet another destructive derivatives product. “There’s no reason to become alarmed, and we hope you’ll enjoy the rest of your flight. By the way, is there anyone on board who knows how to fly a plane?” Sorry – once you start quoting the movie, “Airplane”, it is almost impossible to stop.

Facebook’s lackluster IPO performance also affirmed what we all know but most don’t like to confront – the public markets are significantly broken. It is challenging for companies to thrive in a trader-centric marketplace where fundamentals are rendered practically meaningless and company stock prices are at the mercy of extraneous events. Last week, Europe sneezed and Facebook caught the flu.

Unfortunately for Facebook, not too many traders came to the realization that Europe’s bleak financial future and rising unemployment actually benefit Facebook’s business. Look how many more jobless people will now have time for Facebooking. Does anyone see the irony here?

Facebook, say goodbye to the autonomy of the private markets. Now, instead of being valued on your own merits, you’ll be assessed based on the accomplishments and failures of those who have nothing to do with you, subject to the second-by-second mood swings of those judging you. Welcome to public market hell where you will now be viewed as a ticker symbol as opposed to the global innovator you are.

Don’t worry, “FB”, many considered the IPO of “GOOG” to have been a great disappointment too. Contrary to “GOOG”, at least you were not forced to slash the price and size of your offering. And remember Webvan’s hot IPO? Its stock price more than doubled during its first trading day. Perspective.

So just where was Facebook’s aftermarket love on Friday? This leads me to the final and most important lesson of the day. Even the most grandiose of companies have trouble thriving in a marketplace that lacks the aftermarket support derived from long-term investors who are more interested in funding companies rather than trading tickers. These long-term investors are a company’s clients, its customers, its users, its partners and its supporters. In Facebook’s case, they are the 900 million across the globe sharing updates, photos and videos every day. If each user bought just one share of FB, it would equate to $34.2 billion in pent up demand.

I don’t doubt that Facebook will ultimately achieve success in the public markets. It is one of maybe a handful of companies on the planet, including AAPL and GOOG, who can provide its own aftermarket support by harnessing the crowd. According to Gene Massey, CEO of MediaShares and leading expert in Direct Registration methods, “Once Facebook has been public for 12 months, it can offer a direct stock purchase option to its massive user base. By doing so, it will not only gain stock support, but Facebook will also add valuable shareholder demographics to its existing database enabling it to become the world’s most powerful marketing and fulfillment company in history.”

Unfortunately, the vast majority of companies entering the treacherous public markets do not have a support group of 900 million. Unless something is done to fix the aftermarket deficit, more and more publicly traded companies will find themselves dying a slow painful death. This will only result in additional long-term investors fleeing the public markets in search of greater stock appreciation.

The fact is the mass exodus has already begun. The fastest growing companies no longer reside on NASDAQ. They are found in the rapidly expanding marketplace for private company stock (PCM).  

Facebook has inspired a new generation of social businesses poised to capitalize off its extraordinary media platform. Many of these micro and small cap companies are already enjoying spectacular revenue growth. Historically, most of these companies would have been public at this point in their life cycle, creating wealth for public market investors. However, it makes no fiscal sense for these companies to be public today.  

These private companies are all thriving, in part, because their investors consist of long-term shareholders who believe in their products, their businesses and their visions. Don’t all companies deserve the right to attract investors whose interests are more aligned with their own? Shouldn’t all investors have the opportunity to invest prior to a company’s greatest growth spurt? Shouldn’t all investors have the freedom to invest their own money as they see fit?

224 days, 16 hours, 38 minutes, 16 seconds until the democratization of the US capital markets.

His title alone makes me cringe. Since when does investing come with safety nets? Investing involves risk. In fact, the entire concept of investing is weighing risk versus reward. Mr. Sorkin, do you even comprehend the magnitude of what your article intimated? You are basically insinuating that it should be the Government’s responsibility to assure investment returns. Somewhere, Ayn Rand is rolling over in her grave.

Let’s get one thing straight, I am all for investor protections. But unlike you, Mr. Sorkin, I also support a capital markets system that provides fairness to ALL investors, not just to the 1%. I further endorse a bill that allows for investor protections without sacrificing our nation’s greatest innovators.   For far too long our capital markets have been hijacked by PIPE funds, program traders and a handful of supersized investment banking and institutional firms at the expense of our small businesses. The JOBS Act democratizes our capital markets, brings equality to retail investors as well as emerging companies, and most importantly, it hands the capital markets back to the 99%.

The “Crowdfunding” component of the bill that you condemn actually levels the investment playing field by permitting smaller investors to invest prior to a company’s greatest growth spurt as opposed to having to wait until its IPO when the majority of the appreciation had long passed. Why do you take issue with the 99% being afforded the same opportunities to grow their money as the 1%?

Since you obviously lack an understanding of crowdfunding, allow me to educate you. The Crowdfunding Marketplace could not be more distinct from the unbalanced conventional markets you outwardly shield from crucial regulatory reform.

Unlike most public market investors, crowdfund investors are long term, benevolent shareholders who invest in a company, not because they have a “get rich quick” mentality, but because they truly appreciate a company’s business, its mission, its value to the community and its potential impact on society. In fact, crowdfunders value a company’s business so much that they are currently funding projects without even receiving an equity stake. Imagine a PIPE investor forgoing his equity because his true motive is to see the company succeed? I can’t even envision him not securing his return by demanding a steep discount plus a warrant kicker for “risking” his capital. 

Crowdfunding allows businesses to obtain shareholders whose interests are more aligned with their own. This alliance gives companies a greater chance to succeed. If crowdfunding achieves nothing else but altering investing behaviors and making it “chic” to be a long term shareholder again, it will go a long way towards improving our capital markets, our economic future and even advancing society as a whole.

Finally, Mr. Sorkin, please understand that if you regulate the risk out of our capital markets, you will be regulating our nation right out of innovation, growth, global competitiveness and yes, job creation. Not every company will succeed. In fact, many will not. But our capital markets were built on the back of many failures as well as successes. Had it not been for those failures, there might never have been an Apple, Intel, Microsoft, Google or a Facebook and you would have written your irresponsible propaganda cloaked as journalism with a fountain pen instead of on a keyboard.

The New York Times needs to stop decapitalizing the markets under the pretense of investor fairness when their actions will only lead to greater injustice.  If it truly wants this nation to prosper, it will put an end to encouraging mediocrity and dependency through careless rhetoric of unwarranted safety nets.

Recently, there has been a lot of heated rhetoric about this legislation. Unfortunately, most of the discourse has been stemming from those who couldn’t make a distinction between capital markets and CAPTIAL LETTERS.

During my 20 year career on Wall Street I had the opportunity to experience our capital markets at their best and at their very worst. In the 1990’s I had the privilege of being part of the ecosystem that took some of today’s most recognizable technology names public. I watched syndicates of small broker dealers unite to fund innovation and pool resources in order to support aftermarket trading. I experienced the results of those efforts as the Internet revolutionized the planet and changed the fabric of our everyday lives. I witnessed NASDAQ’s extraordinary rise and fall from a communal Quotron in a retail brokerage branch to a PC in my living room to a PDA standing in the middle of a third world country.

Sadly, I also observed the rapid decline of the capital markets as they were seized by program traders, PIPE funds and daytraders more interested in funding tickers than investing in businesses. To the detriment of innovation and entrepreneurship, those vital investment banking boutiques were driven out of business or gobbled up by big conglomerates. For nearly a decade now, our public markets have been monopolized by a handful of mammoth investment banking firms competing to underwrite the limited supply of large cap companies just so they can line their pockets by placing that stock in the accounts of their largest and most favored institutional clients. It was this practice, encouraged by antiquated regulation, that led to the demise of America’s economy.

The passage of The JOBS Act will put an end to this “circle of big” and once again allow capital to flow to our innovators, our entrepreneurs, our job creators! Additionally, it will level the investing playing field by permitting smaller investors to invest prior to a company’s greatest growth spurt instead of having to wait until the IPO when the majority of the appreciation had already passed. Imagine “the 99%” investing alongside “the 1%”and being afforded the same opportunities to build wealth? It’s easy if you try. Soon the world will live as one. Kumbaya.

This bill not only opens so many new doors to capital, but it also facilitates the procedures by which that capital can be obtained. Embedded in this legislation is Rep. Patrick McHenry’s “CrowdFunding” bill that finally brings our markets to the 21^st century by allowing emerging private companies to raise capital via social media. This legislation also does away with other obsolete regulations such as the general solicitation and advertising ban for unregistered securities and the “500 shareholder rule”. All of these changes will enable companies to stay private longer and thrive in the private markets as opposed to dying a slow small-cap death in the treacherous public markets.

Times are changing. Technology is advancing. It is inevitable that our capital markets will be evolving. This is not just piece of legislation – this is progress.

Skeptics say that this bill undermines SEC oversight and would lead to fraud. Isn’t it funny how naysayers are quick to offer criticism without providing suggestions for improvement. If only it were as easy to form an idea as it is to critique one.

Is the bill flawless? No. But anything is better than the status quo, and in concert, our Wall Street veterans, business leaders, entrepreneurs, legislators & regulators can perfect it. I implore members of the SEC to join us at an upcoming TSL capital creation event where thought leaders coalesce and endeavor to repair the damaged capital markets.

Collectively we can design the proper regulatory framework for the private markets. Together we can rebuild a capital markets that assures investor protection while enhancing capital formation. With our efforts unified, the U.S. capital markets will once again become the envy of the world.

We owe it to our children to leave them a prosperous America.

Sincerely,

A Mom on Wall Street

I’ve read everything from, “Undervalued” to “Facebook will save California’s economy and resuscitate the IPO market” to “Facebook’s IPO marks the end of private markets” to “Overhyped and Overvalued”. The viewpoints are limitless; unfortunately the same cannot be said about opportunity. I thought it was time to step out and make sense of all of this mayhem before too many heads explode and too many opportunities are lost.

Firstly, I find it amusing that the more the skeptics cry, “bubble” and attempt to remind us of pets.com, the higher the price Facebook’s shares climb in the private markets. Overvalued? Really? Did I miss something? Have stocks suddenly started trading on fundamentals again?  Perhaps I was too busy updating my Facebook status to notice the widespread return to the old fashion investment principles of investing in businesses rather than tickers.

Like nearly every publicly-traded company, Facebook’s fundamentals are inconsequential. I can’t understand why analysts are even bothering to waste their time dissecting every last number in the filing (starting with the 1 in the S1) when they should be paying more attention to the big picture.

Here’s the big picture…

Anyone who thinks Facebook is overvalued must not have heard of the “Cousin Cara Factor”, named after my cousin, Cara. Cousin Cara (I call her that because that is her name) has never bought a stock in her life. Although she can build a damn fine looking virtual farm, I don’t think she could differentiate between a stock and a sock. In fact, I remember once telling her that I needed to hang up the phone because the market was crashing. To which she replied, “Someone is crashing into the market! Where am I going to buy my beefsteak tomatoes tomorrow?”

Yet lo and behold, Cousin Cara called two weeks ago inquiring how she can buy shares of Facebook. Now just imagine 845 million cousin Caras clamoring for shares. If that seems farfetched, visualize just 15% of Facebook’s user base bidding for just 1 share each – that still equates to over 126 million Caras controlling over $5 billion worth of demand – a little more than the entire float. We are in unchartered territory here. Never before has a company with this much global influence and consumer fascination penetrated the public markets. Consequently, Facebook possesses one asset that distinguishes it from virtually every other company on the planet: built-in aftermarket support. It reminds me of a joke that I don’t find very funny:

“How many brokers does it take to sell Facebook shares?” ——- “None, but that doesn’t stop 20 of them from getting in between a buyer and a seller and killing a transaction.”

Will Facebook ignite the IPO market? Perhaps. Will it resuscitate it? No.

In order for our IPO market to thrive once more it would require the implementation of a functional aftermarket support system. Without a mass influx of companies with significant investor reach and embedded support platforms going public, we would need to see the resurgence of smaller broker dealers, analysts and market makers getting behind lesser known names. The likelihood of BD’s backing smaller cap companies with penny trading spreads? Nil. The odds of a hundred more Facebooks filing to go public in the near future? Less than nil.

Without sufficient aftermarket support there will be no small cap IPO renaissance to save our economy during this era of unrivaled innovation. Our only savior is the Private Company Marketplace (PCM) where high growth companies with enticing spreads already exist. Those who are calling this the end of the private markets are about as visionary as a bean counter – no offense to bean counters, you once served a great purpose before calculators were invented. Wake up, people. This is not the end of the private markets. This is just the beginning.

Don’t forget to register for TSL’s Capital Creation and Crowdfunding Conference in Los Angeles on March 13^th and 14^th for an unparalleled opportunity to meet the players who are shaping the Private Company Marketplace (PCM) as well as learn how to capitalize in a changing capital markets’ paradigm.