Private Exchanges Lose Top Listing, What’s Next?
From investors, to investment banks, to employees, everyone appears to be excited about Facebook’s I.P.O. How could you not be? But one Wall Street group is saying not so fast: private exchanges.
In the last few years, private shares from Internet companies have traded on these exchanges including Twitter and LinkedIn (NYSE:LNKD). Facebook has also been an active participant, providing a lot of this growth for this marketplace. One exchange, SecondMarket, saw a third of its total revenue in 2011 come from trading shares of Facebook.
With Facebook moving toward the public market, its shares will now trade on either the New York Stock Exchange (NYSE:NYX) or the Nasdaq (NASDAQ:NDAQ). The private exchanges have already lost LinkedIn and Groupon (NASDAQ:GRPN) to the public market but with Facebook’s move, it will lose its Golden Egg.
But it doesn’t mean it’s the end for the private exchanges.Two of the leaders, SharesPost and SecondMarket,still expect their businesses to grow.
Gregg Brogger, the president and founder of SharesPost said, “We certainly expect a reduction in revenue, but we also expect some companies like DropBox to step in. Venture capitalists always have another generation of new start-ups, and our market will as well.”
SharesPost has been around since 2004 and SecondMarket arrived on the scene in 2009. During the last few years employees and early investors of such companies as Facebook, Twitter, and Zynga wanted to get rid of their holdings as their company’s market value rose. Buyers were interested the companies, anxious to own a piece before they went public.
Trading volume growth of the private exchanges has been very high. According to the New York Times in 2009, SecondMarket had $100 million worth of private share transactions. Two years later, volume had increased six-fold, with Facebook dominating it.
SharesPost also had a great 2011, taking in $625 million in transactions and doubling numbers from the previous year.
Regulators’ Eyes are Watching
With their success, the Securities and Exchange Commission has been sniffing around. The regulator asked the private exchanges about a year ago regarding its trading in Facebook, Twitter, Zynga (NASDAQ:ZNGA) and LinkedIn. They are specifically reviewing the market’s transparency and companies disclosures.
On Wednesday in its I.P.O. filing, Facebook noted that had been working with the S.E.C. in its investigation into secondary trades for private sale of its stock. The company believes it has complied with the federal securities laws for the transactions.
The S.E.C. is also looking at a rule change that would be advantageous to SecondMarket and its rival exchanges. Currently, rules state that private companies with 500 or more shareholders are required to provide increased financial disclosure to the regulators.Now the S.E.C. has said they may raise that number, which could have companies remaining private for a longer time.
Meanwhile without Facebook, which the exchanges will most likely never see the likes of again, continue to forge head. SecondMarket is trying to evolve into a more seasoned exchange. It now requires companies to include financials when selling shares, creating additional transparency.
In 2011, SharesPost added 40 companies to its listings. It has also updated its trading platform for companies desiring additional control such as an online dashboard.
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