Private Company Marketplace (PCM)

The Private Company Marketplace (PCM) is the name ascribed to the maturing marketplace where non-public securities are bought, sold, lent and borrowed.

WHY IS THE PCM VITAL TO OUR ECONOMIC GROWTH?

For far too long our public markets have been monopolized by high frequency traders and a handful of supersized banking conglomerates at the expense of our small businesses. As a result, our capital markets, once the envy of the world, have regrettably become an impediment to job creation and economic growth. Without the ability to successfully IPO as a small cap stock, investors have less access to quality growth companies and fewer opportunities for impressive appreciation, while emerging companies are left with limited appealing options for raising growth capital.

Since early 2010, we have been observing the rapid evolution of a marketplace for private company stock that, by upholding long-term growth investing principles, provides the ideal environment for today’s emerging private companies to flourish. Coinciding has been the mass materialization of Crowdfunding platforms aimed at helping small businesses obtain start-up capital from a wide spectrum of individual funders. In most cases, these funders are either consumers of the company’s products or believers in the company’s mission.

THE EMERGENCE OF THE PCM

2010 was the year when significant investment demand for social web companies gave rise to a new marketplace where private companies were able to provide liquidity to its employees and shareholders while steering clear of the public marketplace. As most fund managers squandered 2010 in the public markets vying for companies that generated lackluster returns, private companies being exchanged in the private company marketplace, such as Facebook, Zynga, Twitter and Groupon, appreciated massively. Young private companies were able to leverage the novelty of the PCM and the momentum in social media in order to increase shareholder value and capture the attention of prestigious Wall Street firms.  The prime example was Goldman Sachs’ January 2011 investment into Facebook at a $50 billion valuation, shortly following the trading of its shares on private secondary platforms in the $50B market cap range.

Most of these once thriving private companies now languish in the public markets due to changes in market structure that have led to the annihilation of the aftermarket support system which once upon a time galvanized a successful small cap IPO market and fueled NASDAQ’s extraordinary growth.  Because there is no longer a respectable public stock market that accommodates emerging companies being public at lower valuations, ordinary investors are left with limited access to quality growth investments. With interest rates at all time lows and dismal public stock market returns, most investment portfolios will never be able to keep up with inflation.

What was once NASDAQ’s most important function – enabling the capital of the investing public to fuel innovation and small business expansion – is gradually being replaced by the private company marketplace. The same principles and ingenuity that once propelled NASDAQ to unforeseen heights is now energizing the PCM as an aggressive new generation of emerging companies, able to create value far faster than was ever possible before, choose to stay private longer. [1]

As innovations such as tablets, smart phones and social networking platforms continue to revolutionize global communications and inspire a surge of world-changing businesses, more and more of the fastest growing private companies are likely to discover the advantages of having an active trading market for its private shares. Such benefits may include the likelihood of a higher market capitalization, given that the PCM is free of the harmful stock manipulation practices which run rampant in the public markets (ie: high frequency trading and dilutive PIPE financings). Private companies are also beginning to understand how having a market for its private stock can be helpful in attracting key personnel and expansion capital.

THE LEGISLATION FUELING THE PCM

Ground-breaking legislative changes stemming from the 2012 passage of the “Jumpstart our Business Start-ups Act” (JOBS Act), including the raising of a privately held companies’ shareholder threshold from 500 to 2,000 without triggering SEC reporting, lifting the ban on general advertising as well as the legalization of Securities-based Crowdfunding, will undoubtedly contribute to the significant expansion of the private company marketplace.[2]

The JOBS Act amends unjust regulation that has stymied economic growth by restricting small investors’ access to private growth companies and by granting large corporations a disproportionate advantage raising capital in the United States. By democratizing the financial markets and allowing America’s smaller investors and issuers a greater chance to prosper, we are hopeful that this legislation will lead to the narrowing of the nation’s great wealth divide.

In this remarkable moment in history, with the U.S. regulatory environment, its capital markets and the innovation driving those markets simultaneously on the threshold of extraordinary change, there has never been a more opportune time for America to prosper.

PCM PARTICIPANTS

• Private Secondary Platforms:
  • GATE Technologies - The GATE Platform offers a complete end to end solution by combing a regulatory compliant transactional platform, settlement and clearing services with global connectivity, enabling qualified investors and institutions to trade the most complex alternative assets with confidence.   GATE Technologies gives market participants the transparency, efficiency and liquidity they need to view all market activity, ensure regulatory oversight and lower transaction times.
  • SecondMarket - (formerly Restricted Stock Partners) is an American online marketplace for buying and selling illiquid assets, including auction‐rate securities, bankruptcy claims, limited partnership interests, private company stock, restricted securities in public companies, structured products, and whole loans.
  • Sharespost - Sharespost possesses the largest online network of private company investors ever assembled and the broadest offering of independent, third-party research. It’s all designed to make the process of managing secondary liquidity and raising primary capital easier and more transparent than ever before.
  • Xpert Financial - Xpert Financial’s™ goal is to revolutionize the financial markets for private companies. Through its registered broker-dealer subsidiary, Xpert Securities™, they provide a fully-electronic online trading platform, called Xpert ATS, that enables private companies to raise capital, investors to access quality private company investments, and shareholders to trade private company securities, all in a highly-efficient, transparent and controlled manner.

• Private Share Desks:
  • Greencrest Capital - Greencrest is a leading research and advisory firm that provides insight-based access to exceptional private companies and rapidly growing, revolutionary industries. Greencrest’s rigorous and objective approach advances private market transparency and client interests, while giving institutional investors necessary information for successful entry into a dynamic sector of the economy.
  • Liquidnet - Liquidnet is the global institutional trading network that connects over 700 of the world’s top asset managers to large-scale equity trading opportunities across the globe—39 markets across five continents. With an average trade size of approximately 50,000 shares in the US, 63,500 in Canada, and greater than $1 million in Europe, Africa and Asia Pacific, Liquidnet is the leader in large block trading globally.
  • GFI Group – GFI is a global leader in providing a wide range of solutions for trading equities. The Private Shares Group at GFI was developed to service the need for liquidity among holders of private company stock. In line with GFI’s proven track record as a cutting edge wholesale broker with roots in technology, the Private Shares Group works in the alternative investment class servicing investors in illiquid assets including asset managers, endowments, family offices, financial institutions, foundations, fund of funds, and public and private pensions.
  • Wedbush Securities - The Private Shares Group of Wedbush Securities is a leader in providing research and trading to the rapidly growing industry of privately traded securities, with an emphasis on companies in the social media space. Wedbush assists companies in raising growth capital through traditional private placements and provide monetization options for existing and former employees through tailored liquidity programs. Wedbush also works with Venture Capital, Private Equity, Hedge Fund and traditional institutional investors to help them adjust their holdings in some of the most dynamic companies in the world.
  • Emerson Equity - As a full-service brokerage firm, Emerson Equity was founded with the vision of providing individual investors with complete financial planning and highly personalized investment management services. Backed by one of Wall Street’s largest clearing firms, Emerson Equity offers an extensive array of products to meet one’s financial objectives, including: equities, bonds, options, mutual funds, CDs and retirement plans.

• Research and Data:
  • NowStreet Journal - NowStreet Journal is a leading provider of analysis and insight into the private company marketplace, including the legislation and innovation fueling it. Based on an original hypothesis that directly correlates advancements in mass communications with stock market growth, NowStreet highlights the dynamic economic impact of a purely growth marketplace rising during the most ground-breaking period of mass media and regulatory reform.
  • ArcStone Equity Research - Arcstone Equity Research is redefining liquidity by bringing together the best in equity research and private company valuation.
  • PrivCo - PrivCo is the premier source for business and financial research on major privately-held companies (MPCs). In the United States alone, there are over 150,000 operating firms that each bring in over $10 million in annual revenues, yet the traditional business media focuses almost exclusively on the same 15,000 publicly traded companies. By combining the very best financial analysts, editorial quality review, market research, and our proprietary data technology, PrivCo is dedicated to producing intelligent, in-depth business and financial research on the other 90% of major corporations.
  • peHUB - Written by Thomson Reuters Deals Group journalists, who also report for Buyouts Magazine and Venture Capital Journal, peHUB is an interactive forum for the global private equity community, which includes venture capitalists, buyouts professionals, public pension funds, endowments, foundations, lenders, investment bankers, attorneys, entrepreneurs, MBA candidates studying PE, and assorted hangers-on.
  • Second Shares - Second Shares is a social media company that provides news, commentary, and Wall Street style analysis on the companies driving the social media revolution.

• Crowdfunding:
  • Once the SEC implements the rules for Crowdfund Investing, officially legalizing it, Securities Crowdfunding will play an integral role in the PCM. To learn more about Crowdfunding, please click here

 REFERENCES

1. A wake-up call for America. By David Weild and Edward Kim, November 2009
2. Why are IPOs in the ICU?  By David Weild and Edward Kim
3. Market structure is causing the IPO crisis – and more. By David Weild and Edward Kim, June 2010
4. Crowdfunding – What You Should Know. By NowStreet Journal
5. Why the JOBS Act is a Win for Entrepreneurs and Investors. Inc, March 28, 2012
6. Facebook Drives SecondMarket Broking $1 Billion Private Shares. Bloomberg, April 2011

Click here to join The Private Company Marketplace (PCM) LinkedIn Group

Related articles

• Good Knight Public Markets (nowstreetjournal.com)
• GSV Capital, Placing Bets on Start-Ups, Falters (dealbook.nytimes.com)