Private matters at NASDAQ

Little more than a decade after NASDAQ self-listed and began trading on the OTC bulletin board, the electronic exchange is going private. Well, not exactly. But the launch of the NASDAQ Private Market (NPM) in a joint venture with the San Francisco-based start-up SharesPost does promise to transform trading in private company shares from a fragmented and opaque backwater into an organized and transparent market.

Backed by NASDAQ’s capitalization, reach and reputation, NPM may also change the nature of pre-IPO and IPO investor relations and the way in which companies go public. While the financial terms of the deal have not been disclosed, NPM is expected to launch later this year, pending regulatory approvals, according to NASDAQ.

‘Most successful companies going through hyper-growth want to stay private as long as they possibly can,’ argues Greg Brogger, chief executive and founder of SharesPost, a private share market that rose to prominence two years ago as investors sought out shares in social media companies that had yet to go public, such as Facebook.

Pointing to Google as an example of a company forced to go public before it wanted to, Brogger, who will serve as president of NPM, credits the recent passage of the JOBS Act with making the private company market in the US potentially much larger. Under the act, passed last year, the threshold number of shareholders that would force a firm to go public was increased from 500 to 2,000 and excludes employee shareholders from the tripwire that caught Google.

Brogger estimates that fewer than 100 private companies today have allowed trading in their stock, but he sees growing demand; while companies want to remain private longer, early-stage investors, founders and employees all seek to cash in shares without waiting years. Tech start-ups tout their ‘liquidity plan’ along with employee benefit and 401K plan when recruiting top talent, he notes.

Reasons not to list

Companies choose to remain private to avoid the expense, regulatory and disclosure burdens of being public. Technology companies, in particular, want to keep not just financial information but also sensitive business information – such as strategy, technology and market data that public company investors routinely expect – out of the hands of competitors and the general marketplace.

While calling transparency a ‘key part’ of NPM, Brogger describes several key differences between private and public markets. Unlike listed companies where financial disclosure is mandated by SEC regulation, in the private company market, buyer and seller agree on what level of financial disclosure is acceptable before a transaction can occur. Except for employees of a private company who can sell their personal shares, market participants are limited to qualified institutional buyers and accredited investors, the same players trading in private placements today.

In addition, companies choosing to put their shares on the NPM can limit who sees information about the company and who can buy the stock. This controlled information and trading access is a key differentiator with the SharesPost platform, explains Brogger, and the focus on a more limited and sophisticated set of investors transforms IR from a one-to-many conversation into an invitation-only dialogue.

Brogger describes private markets as ‘an interim step’ for pre-IPO companies. By selectively building a private shareholder base ahead of time, a company will have established an informed audience of major institutional investors who know the company and management, have seen detailed financials and followed company performance years before the IPO. As the company approaches its IPO, it will know which long-term shareholders to target and who the story resonates with.

‘They’re not putting it together in a two-week roadshow; it’s a far less chaotic, more controlled process,’ Brogger observes. ‘It makes the process of going public administratively easier, and a much more manageable process.’