A Second Market Is Emerging

Claire Cain Miller has a story in today's NY Times about Second Market, a NYC based company that makes markets in illiquid securities. She reports that they will shortly be launching a marketplace for private company stock.

I've written about this idea in the past and I think it is badly needed. Not everyone can wait until the exit comes or the IPO market comes back. We are seeing a lot of founders selling portions of their stock privately, mostly to the other investors in their companies. But that is not a transparent or particularly liquid market and it is not clear that the founders or the investors buying their shares are getting a fair deal.

A better idea is to create a marketplace where sellers and buyers can meet and where both sides can get price discovery. When you know the latest prices and can get a price history, you can be more confident of your purchases.

Last week Mike Arrington wrote a post on Facebook turning down an offer to invest at a $2bn valuation. I left a comment on that post saying that I thought that $2bn price was low given the prices being paid in the Facebook secondary market. Later that day, I got a private email with a price chart for Facebook common since January 2008. I was asked not to publish that chart so I won't. That chart showed that Facebook common has traded as low as $6/share earlier this year but is now trading around $8/share. That translates into $3bn to $3.5bn, lower than I had suggested in my Techcrunch comment.

Seeing that chart was a real "aha moment" for me. There is enough activity in Facebook common that we can tell at any time what the market price is and we can also see how that price has changed over time. Like I said in a post last week, it's like Facebook is a public company without really being public.

I understand that there are issues with this development. It will be harder to strike options at low prices when the company's stock has a price history. It will be harder to control who the shareholders are and it will be harder to keep employees motivated to stick around if they can cash out early. These are all problems companies usually don't face until they go public. Now they will have to face them earlier.

But I still think this is a really good idea. Claire talked to me about this story and I told her:

Entrepreneurs won’t start companies and investors won’t invest in them
if there is no path to liquidity on the company stock. A secondary market for private company stock can
fill the gap that the lack of an I.P.O. market has created.

I don't believe that the secondary market will replace the public markets and M&A as the primary liquidity options for venture backed startups. I think it's a third choice that we need. And I think it represents a tier in the market that is missing between venture capital and the public equity markets. There are about a half dozen other startups working on creating markets of this kind and I expect we'll see all of them launching in the next six months. I hope that one or more of them makes it and that we'll develop a robust, liquid, and transparent secondary market in the next few years. I know we need it.

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Comments (Archived):

  1. Steven Kane

    Won’t private companies become de facto public companies if the private issue secondary market allows the number of shreaholders to exceed the SEC limit (599 total, I think?) Then these companies which think they are private will be forced to do all the SEC disclosures and filings –a huge burden and pain, especially galling considering the companies will not had access to the capital of the public markets (only the individual shareholders who sold — not the company — will have recouped capital.)

    1. fredwilson

      these markets allow companies to limit the buyers to a list of known entities so that issue can be managed that way.also, facebook’s lawyers have apparently figured out a way around the 599 limit (at least that’s what I’ve heard, i don’t have the facts)

      1. Louis Berlan

        That last point is hugely interesting…hopefully at some point how they get around the 599 limit will be explained.Are there many companies (apart from the “public” ones, like Facebook) that really run into this 599 problem though, considering that the requirement is for qualified investors? Even with these second markets (which sound brilliant).

      2. JLM

        FB simply asked for an “exemption” from the SEC and it was granted

        1. fredwilson

          Thanks for doing the homework on that JLM

    2. C Coulson

      Since we run the largest marketplace for U.S. trading of company shares that are not registered with the SEC, I can add some clarity to a few of the questions.500 Shareholders Rule – The SEC requires registration if a company has over $10 million in assets and 500 holders of record. However, the number of holders of record is usually much lower than total shareholders (known as beneficial holders) because investors that hold their shares at their brokerage firm are not counted individually. If a Broker-dealer has numerous individual investor accounts that hold a company’s shares, the holders of record list will only show the broker-dealer as 1 holder of record. A good example, EDGAR Online (NASDAQ:EDGR) has only 72 holders of record of their common stock according to their latest 10K, despite having been traded on the NASDAQ Stock Market since 1999. The ABA is even pushing for the 500 number to go up: http://www.aba.com/Issues/I… What this means for private companies is that they can have a pretty developed shareholder base before being required to register with the SEC if they are proactive about making sure free trading shares are held at brokerage firms.

  2. aweissman

    Utterly needed and welcome.But also typical VC deals have stock transfer restrictions like rights of first refusal and co sale agreements – generally designed to ensure a closely held shareholder base (among other things). I wonder how do or will those restrictions play into something like Second Market (or any secondary market).

    1. fredwilson

      One of the benefits of working with second market is that they work with the company and the company’s lawyers to deal with ROFR and other transfer restrictions

      1. aweissman

        so they restructure the ROFR and other restrictions to make the secondary market work – that’s interesting.So now – how would you feel about the CEO, for example, of one of the companies in which you invest, selling for example 50% of his or her shares on the secondary? How would he or she feel about your fund doing the same?

        1. fredwilson

          They don’t restructure the ROFR, they just work with the company to get it waived for the specific transaction, if possibleI would not be happy with the CEO selling 50%. I would be more comfortable with something like 10%.I think the portfolio company would not be comfortable with us selling 50% either, but it could happen. Investors ultimately want liquidity.

  3. stone

    This is critical and cannot be overstated. Perhaps the VC community should come together to support this concept, perhaps by joining forces with an investment bank. I think Goldman might be interested. They have something like this for companies that do not want to go public.

    1. fredwilson

      There are roughly five or six of these emergingAll of them are backed by VC firms (not ours)So I’d say the VC community is certainly supporting this effort

  4. Druce Vertes

    Investors getting sold securities without any disclosure and accountability – this is exactly what the SEC was set up to prevent, right? like unregistered schemes with promises of impossible returns? (irony alert)Publicly trading ‘private’ securities is kind of an oxymoron – in what sense are they ‘private’, except that the rules for being sold to the public have been circumvented?If Facebooks are traded ‘privately’, and that market is validated, aren’t people going to abuse it and try to sell the ‘next Facebook’ the same way to unsuspecting investors? (nothing stopped TheGlobe.com from going public, by the way) Letting people trade quasi-private securities is not a good answer if it brings the whole market into disrepute.Seems to me what’s needed is a ‘public light’ so companies are not forced assume the entire burden of public disclosure before they’re ready, and investors get a minimum amount of marketability and disclosure. The regulatory burden doesn’t need to be the same on the Exxons of the world, and relatively young companies like Facebook.One thing that’s gotten us into this mess is people being clever about circumventing rules that were put in place for what seemed a good reason at the time, and regulation being way behind the curve (archaic might be a better word). Onerous demands are placed on public companies, while regulators are unable to stop egregious behavior in plain sight.That’s the underlying problem, and would be interesting to explore what disclosure and accountability is reasonable and desirable before you can market your securities.

    1. C Coulson

      Sales of Securities Without Disclosures – The SEC updated Rule 144 in late 2007 to make it easier for non-affiliate investors to be able to sell securities after a one year holding period. The view point being that if the issuer or an affiliate (officer, director, large holder, etc) is selling there always needs to be disclosure publicly available, but for non affiliate they should be able to easily sell after a one year holding period. http://www.venable.com/file… or http://www.mayerbrown.com/p…What this means for private companies that raised capital over a year ago is that they already have free trading shares in the hands of early investors and employees that can create a public market. For investors that have held their shares over one year, they now have more options.

  5. ErikSchwartz

    Isn’t this essentially just OTC trading and isn’t Second Market pretty much just a Market Maker? How is this different from any other OTC traded stock?

    1. randhir

      Erik, I think they might actually be talking in terms of an exchange with a clearing system in place.

    2. fredwilson

      I think there is some regulatory burden for OTC stocks but honestly I don’t know for sure

      1. ErikSchwartz

        What I don’t get is how these are functionally different than OTC shares so why there would be no SEC oversight.

      2. JLM

        OTC.BB is part of NASDAQ with similar restrictions. In many instances, OTC is all the “markete” many good sized companies really require. Take a look at otcbb.com and see how orderly it is for obtaining info including Level II quotes. You can see every bid and ask from every market maker in real time (costs) or 20 min delay (free).

    3. C Coulson

      Isn’t this essentially OTC trading? Second Market is offering one form of OTC Trading, which being a negotiated agency model broker-dealer. Almost every significant broker-dealer has the ability to handle trades in less liquid or restricted among their sophisticated customers. All of the bulge bracket firms have 144a desks that cross and make markets in 144a and other restricted securities. From the volume and transaction numbers stated in the article, it is a small slice of the OTC market compared to the more open and accessible publicly quoted OTC markets, the OTCQX, OTCBB and Pink Sheets where on average $10+ billion in dollar volume and 1+ million in trades are taking place each month. We (Pink OTC Markets Inc http://www.pinkotc.com) operate the issuer-listed OTCQX marketplace and the broker-quoted Pink Sheets marketplace, as well as provide the inter-dealer trading infrastructure for OTCBB trading. Historically the U.S. OTC markets have been a demand driven broker-quoted marketplace without direct issuer involvement. The OTCBB (www.otcbb.com) is an interdealer quotation system operated by FINRA that requires companies be SEC registered or a U.S. regulated bank. FINRA has no regulatory powers or listing relationship with the OTCBB issuers. The Pink Sheets (www.pinksheets.com) is an interdealer quotation and trading system that does not require SEC registration. Besides offering trading in U.S. company shares, the largest amount of the Pink Sheets marketplace dollar volume and trading is in ADRs and foreign ordinary shares of companies listed on non-U.S. exchanges. There is also significant amount of trading in distressed companies that are either going into or coming out of bankruptcy. These markets have developed because if a broker-dealer receives an order to buy or sell shares in a security not listed on an exchange, they need to get their client the best price. The trading services we offer broker-dealers in OTCBB and Pink Sheets securities are designed around serving broker-dealer needs to provide their clients with fast and efficient executions at the best publicly available price. The great advantage of these markets is that every broker-dealer in the U.S. needs to offer access to trade these securities, especially when there are so many companies falling off exchanges that are widely held. There is a powerful, open network effect of having real-time prices and point and click trading available across E*Trade, TD Ameritrade and other online brokers available to investors, while allowing the leading NASDAQ trading firms to utilize their electronic trading infrastructure to efficiently make competitive markets. The broker-quoted markets provide a valuable service to non-affiliate shareholders that want to get the best possible price for shares they own. However since there is a wide variability in the quality of issuers traded OTC by investors, the broker-quoted OTC markets are an incomplete trading focused market that can be dangerous for unsophisticated investors. A few years ago, we looked at how we could expand from providing electronic broker-dealer trading services and create a better marketplace for the higher quality companies traded OTC. In March 2007 we introduced the issuer listed OTCQX marketplace (www.otcqx.com) which allows investor-focused companies use the quality controlled OTCQX listing platform to offer investors transparent trading, superior information and easy access through their regulated U.S. broker-dealers. Companies have the choice of SEC registration or meeting our alternative disclosure guidelines if SEC registration is not required under U.S. securities laws. We use a sponsored community based listing process where pre-qualified investment banks or attorneys provide a professional review of company disclosure. Companies can wrap around the OTC market trading transparency, credible disclosure, blue sky compliance and most importantly the quality control of a listing process to separate themselves from the speculative, distressed or disengaged issuers traded OTC.The OTCQX platform started with strong international listing demand, but now as Sarbanes Oxley is coming to smaller U.S. companies, we are building a pipeline of domestic companies as well. In less than two years, OTCQX has grown to over 50 companies and twice the monthly dollar volume of the OTCBB. We think OTCQX is really a game changer for pre-NASDAQ companies that want to engage with investors and provide most of the services that would come with an exchange listing.

      1. JLM

        Great post! You should charge Fred for this much info! LOLI run a little OTCBB company which is closely held (2 investors including myself own 70%).The information which you provide in your post is quite interesting, informative and cutting edge. It is the outgrowth of being able to use the computer and internet to create an “auction” which is, after all, what a stock market truly is.This pre-OTC approach is ultimately going to become the natural way for companies to get public without the necessity of going to Wall Street to be circumcised and shorn — oh, the stories I could tell you of the Thursday 2:00 PM “pricing ritual” charade.Investment banker, big frown on his face: “Well, we ran it up the flagpole and the retail desk says our price is a bit dicey at $18/share. The market is a bit frothy.”IPO CEO: “What do you suggest we do?”IB: “Well, they think they could push it out the door if we lowered it a couple of bucks, but it still might be tight.”IPO CEO: “Hmmm, that’s a real disappointment. We’d been counting on $18/sh and thought it was a bit tight even at that price.”IB: “Well, I’ll stick my neck out and if you will consider, just consider, lowering the price by $2/share, I’ll approach management about the firm taking any shortfalls from the selling syndicate. That way you’ll get all the money. We really want to get this deal done for you.”IPO CEO, frowning: “Well, OK, if you think that the best you can do? OK.”IB (big grin on his face): “Let’s roll!”Two days later when the deal was fully subscribed and the “green shoe” was sold in addition and the price has gone up $12/sh —IPO CEO: “I was surprised how well the offering went even though we got $2/sh less than we bargained for.”IB: “Yeah, “sometimes” that happens. The market firmed up a bit.”IPO CEO: “Who bought the green shoe?”IB: “Uhhhh, well, ah, we did. Just trying to be helpful.”IPO CEO, looking like he had received a barbed wire enema: “Wow, thanks. BTW, do you still own it?”IB, looking like a Barbary Pirate: “Well, no, we sold it at $30/sh.”

        1. fredwilson

          JLM, I’ve been party to that conversation about the 11th haircut and the green shoe so many times I can’t find the humor in it even though you are a very funny guy

          1. JLM

            Not funny, ironic? Gallows humor? LOLSome day I will tell you my story when I got up and left and went to the airport on a Thursday afternoon at ML.

          2. fredwilson

            I have a good one like that too

        2. steve

          A little fact checking please – what is described here is illegal. If the underwriter offered the green shoe shares at anything other than offer price they would be in jail.

          1. JLM

            Of course you are technically right however there were more than a few IBs who allocated IPO shares to “friendly” accounts and waited out the 30 days to see what happened.

  6. bussgang

    I understand that there will be a major announcement on this topic at AlwaysOn’s VentureSummit East in Boston in a few weeks. There is clearly a “capital gap” here that needs to be filled.

    1. rossgreenspan

      Seems more like a liquidity/price-discovery gap since the secondary market won’t be used to raise new capital.

  7. Robert Brown

    Go to UNIFIEDMARKETS.UnifiedMarkets Members use its search engine to find Indications of Interest (IOI) posted by other Members to buy and sell securities, businesses and business assets that are of interest, conduct anonymous introductions, discussions and negotiations in confidential on-line Discussion Rooms, and effect all their transactions away from the UnifiedMarkets Website.

  8. Phanio

    I also think this is a great idea but do have a few concerns. Many of my concerns you already mentioned – but I want to include the financial side. I am sure that FaceBook and other companies that participate in this new market will have their financials audited. But, will this information be published? – will investors have access? I can foresee several founders/investors dumping shares in this market right before the company goes bust.Also, not knowing that much about the requirements for selling private shares – I read an article about a year ago where the Nasdaq was creating a similar market – called Portal. But, this market was only open to traders with $100 million in assets. Not knowing that much about the SEC rules – is this an SEC requirement? Highly accredited investors being sophisticated enough and have the where-with-all to understand the risks. Or, will these shares be available to everyone?

  9. Phanio

    One more thing – if a company like facebook has the stability to sell it’s shares (financially) – then why does it not just go public or be bought? If the IPO window is closed and M&A lagging (meaning that investors do not want to participate) – then why would this market be open – why would investors invest here when they are unwilling to invest in an IPO?

  10. Michael Lewkowitz

    This is increasingly important as it gets easier to start companies and we get more people involved in the startup process. If there was greater liquidity resources (developers, management, investors) would be more likely and able to micro-chunk their involvement and recycle the value they create. It ultimately moves us to a more natural mode of organization and will allow more people to make a reasonable living through contributing to startups. It’s a core piece of a venture ecosystem and something the social business markets are playing at too – e.g. http://socialmarkets.org. Looking forward to seeing where this goes.

  11. BmoreWire

    So I’m no finance guy but this sounds really interesting. I would really appreciate a secondary markets for dummies post. i.e. what are the rules/regulations around this that have prevented it from being done before. I know investors need to have certain incomes. But if you are a startup raising money, why wouldn’t you just go to this rather than messing around with angels and VC’s?

  12. llboyd

    hopefully it’ll ultimately provide the IPO market some healthy competition (that it’s already getting from foreign markets) and whip the regulators with some reality – scale back on some of the costly oversight.

  13. FarazQ

    I saw a chart yesterday that was scary. In 2008, The average time from Company formation to an exit (IPO or M&A) was about 8 years. This has steadily gone up from 1999 where the average time was 3 years. Obviously, 1999/2000 were an anomaly and quality, sustainable companies cannot be built that quickly. However, as an entrepreneur 8 years to liquidity is daunting…and I can see how it will deter potential entrepreneurs from starting a company.So, I think a secondary market is a great idea. As an entrepreneur I’d want to have an opportunity at years 3-5 to take a little money off the table. Maybe 10%. This is not any different than any other investment – if you have profits, take a little off the table. Taking too much off the table may signal to investors that the founders are not committed or don’t have confidence in the business going forward…so the right amount is a bit of an art.Overall though, having this secondary market will encourage more potential entrepreneurs to take that first step in starting a company. And that benefits us all.

    1. basilpeters

      Great point Faraz – it is scary. This post on my blog has a graph of that data http://www.angelblog.net/Ve…. This phenomena is a direct result of the larger size of VC funds over the past 15 years.

  14. moon

    Who is going to regulate this secondary market and is anyone regulating the regulators?

    1. C Coulson

      The Over-the-Counter (OTC) marketplace consists of OTCQX, OTCBB and Pink Sheets securities quoted by market makers on the Pink Quote platform, OTCBB securities quoted on the OTCBB and securities with no quotes that are traded in the grey market. Broker-dealer activities in the OTC market, including their activities on the Pink Quote and the OTCBB interdealer quotation systems are regulated by the Financial Industry Regulatory Authority (FINRA) and the U.S. Securities and Exchange Commission (SEC).FINRA is the largest non-governmental regulator for all securities firms doing business in the United States, overseeing nearly 5,100 brokerage firms, about 174,000 branch offices, and more than 672,000 registered securities representatives. FINRA was formed through the merger of NYSE Regulation and the National Association of Securities Dealers. FINRA touches virtually every aspect of the securities business, from registering and educating industry participants, to examining securities firms, writing rules and enforcing those rules and federal securities laws, as well as operating the OTCBB. FINRA also informs and educates the investing public, provides trade reporting and other industry utilities, as well as administers the largest dispute resolution forum for investors and registered firms. Detailed information can be found on the website: http://www.finra.orgFirm Quote (Rule 3320 Offers at Stated Prices and IM-3320 Firmness of Quotations): To ensure the integrity of quotations, FINRA requires every member to trade at its publicly quoted prices. Integrity of quotes is essential to the normal operation of the OTC market as the failure to honor quotations, also known as “backing away”, can be disruptive to a fair and orderly market.Minimum Quote Sizes (Rule 6650): Market participants posting priced quotations in Pink Quote or the OTCBB are firm for certain minimum sizes. Minimum quote sizes are based upon quote price. As the price of a quote decreases, the size associated with a price increases. Mandatory sizes assure a minimum amount of liquidity in the market and add weight to a member’s firm quote obligation.Best Execution of Customer Orders (Rule 2320): FINRA requires member firms to ascertain the best market in which to execute their customer orders. Pink Quote and the OTCBB are the two recognized inter-dealer quotation systems in the OTC market that can be relied upon for electronic best execution if there are two priced quotes. If fewer than two quotations are displayed on an inter-dealer quotation system that permits quotation updates on a real-time basis, FINRA members must contact at least three dealers by phone to obtain other quotations.Protection of Customer Limit Orders (Manning Interpretation, IM 2110-2): FINRA members may not trade for their own account at prices that are equal to or better than the prices of limit orders that they have received from their customers or from another FINRA member firm on behalf of its customers. Protecting customer limit orders encourages the use of such orders by the investing public and results in more capital committed to securities trading in the secondary markets by a source other than securities dealers. The protection of customer limit orders for all OTC securities was implemented in the 4th quarter of 2008Real-time Trade Reporting (Rule 6620): Within 90 seconds, members must report their transactions to FINRA’s OTC Reporting Facility, its service to accommodate reporting and dissemination of last sale reports in all OTC Equity Securities. The rule creates a uniform method of reporting obligations of member firms, including among other things who must report, when those reports are due, what must be reported, and how to cancel trades already reported. Subsequent dissemination of transaction information by NASDAQ, on behalf of FINRA, increases the transparency of the market for OTCQX, OTCBB, Pink Sheets and grey market securities, which, in turn, improves pricing for investors and results in greater volumes and better overall liquidity. in 2008 FINRA expanded the rule to cover real-time trade reporting and dissemination of trade reports to include OTC ADRs and Foreign Ordinary shares.Order Audit Trail SystemSM (OATS SM) (Rule 6950): FINRA has established OATS as an integrated audit trail of order, quote, and trade information for NASDAQ and OTC equity securities. FINRA uses this audit trail system to recreate events in the life cycle of orders and monitor more completely the trading practices of its members. OATS reporting for OTCQX, OTCBB, Pink Sheets and grey market securities commenced on February 8, 2008.Short Position Disclosure (Rule 3360): FINRA members must report their short interest positions in OTC Equity Securities, including OTCQX and Pink Sheets securities, mid-month and end-of-month. Short interest reporting brings more transparency to the short selling activities by member firms, and reduces the possibility of manipulative behavior associated with naked short selling.Naked Short Selling Prohibitions (Rule 3210): FINRA applies short sale delivery requirements to those equity securities not otherwise covered by the delivery requirements of SEC Regulation SHO. Reg. SHO applies to all securities of all reporting issuers whether listed for trading on an exchange or quoted in the OTC market. New Rule 3210 expanded Reg. SHO requirements for FINRA member firms to include non-reporting OTC Equity Securities. Together Reg. SHO and Rule 3210 are designed to limit the possibility of abusive naked short selling in OTCQX, OTCBB, Pink Sheets and grey market securities.Initial Quotation Disclosure Requirements (Rule 6640): To initiate quotations in a new OTCQX, OTCBB or Pink Sheets security or resume quotations after a four day absence or SEC suspension on the Pink Quote or OTCBB interdealer quotation systems, a market maker must first obtain and review certain specified information regarding the issuer. The information is supplied to FINRA on Form 211. When information collection and review by the market makers has been approved by FINRA, the member may submit its quotation to the Pink Quote or the OTCBB, as sufficient reliable current information is available in the marketplace to support the member’s quotation.Trading and Quotation Halts (Rule 6660 and IM-6660-1): FINRA’s authority includes power to initiate trading and halt quotation in all OTC Equity Securities. New IM 6660-1 identifies certain factors that FINRA may consider in determining at its discretion whether to impose a trading and quotation halt in the OTC Equity Securities market. FINRA surveillance of suspicious trading activity by member firms may now bring a regulatory halt to protect investors in OTC securities.

  15. C Coulson

    Since I run the largest marketplace for U.S. trading of company shares that are not registered with the SEC, I can add some clarity to a few of the questions.500 Shareholders Rule – The SEC requires registration if a company has over $10 million in assets and 500 holders of record. However, the number of holders of record is usually much lower than total shareholders (known as beneficial holders) because investors that hold their shares at their brokerage firm are not counted individually. If a Broker-dealer has numerous individual investor accounts that hold a company’s shares, the holders of record list will only show the broker-dealer as 1 holder of record. A good example, EDGAR Online (NASDAQ:EDGR) has only 72 holders of record of their common stock according to their latest 10K, despite having been traded on the NASDAQ Stock Market since 1999. The ABA is even pushing for the 500 number to go up: http://www.aba.com/Issues/I…What this means for private companies is that they can have a pretty developed shareholder base before being required to register with the SEC if they are proactive about making sure free trading shares are held at brokerage firms.Sales of Securities Without Disclosures – The SEC updated Rule 144 in late 2007 to make it easier for non-affiliate investors to be able to sell securities after a one year holding period. The view point being that if the issuer or an affiliate (officer, director, large holder, etc) is selling there always needs to be disclosure publicly available, but for non affiliate they should be able to easily sell after a one year holding period. http://www.venable.com/file… or http://www.mayerbrown.com/p…What this means for private companies that raised capital over a year ago is that they already have free trading shares in the hands of early investors and employees that can create a public market. For investors that have held their shares over one year, they now have more options.Isn’t this essentially OTC trading? Second Market is offering one form of OTC Trading, which being a negotiated agency model broker-dealer. Almost every significant broker-dealer has the ability to handle trades in less liquid or restricted among their sophisticated customers. All of the bulge bracket firms have 144a desks that cross and make markets in 144a and other restricted securities. From the volume and transaction numbers stated in the article, it is a small slice of the OTC market compared to the more open and accessible publicly quoted OTC markets, the OTCQX, OTCBB and Pink Sheets where on average $10+ billion in dollar volume and 1+ million in trades are taking place each month. We (Pink OTC Markets Inc http://www.pinkotc.com) operate the issuer-listed OTCQX marketplace and the broker-quoted Pink Sheets marketplace, as well as provide the inter-dealer trading infrastructure for OTCBB trading.Historically the U.S. OTC markets have been a demand driven broker-quoted marketplace without direct issuer involvement. The OTCBB (www.otcbb.com) is an interdealer quotation system operated by FINRA that requires companies be SEC registered or a U.S. regulated bank. FINRA has no regulatory powers or listing relationship with the OTCBB issuers. The Pink Sheets (www.pinksheets.com) is an interdealer quotation and trading system that does not require SEC registration. Besides offering trading in U.S. company shares, the largest amount of the Pink Sheets marketplace dollar volume and trading is in ADRs and foreign ordinary shares of companies listed on non-U.S. exchanges. There is also significant amount of trading in distressed companies that are either going into or coming out of bankruptcy.These markets have developed because if a broker-dealer receives an order to buy or sell shares in a security not listed on an exchange, they need to get their client the best price. The trading services we offer broker-dealers in OTCBB and Pink Sheets securities are designed around serving broker-dealer needs to provide their clients with fast and efficient executions at the best publicly available price. The great advantage of these markets is that every broker-dealer in the U.S. needs to offer access to trade these securities, especially when there are so many companies falling off exchanges that are widely held. There is a powerful, open network effect of having real-time prices and point and click trading available across E*Trade, TD Ameritrade and other online brokers available to investors, while allowing the leading NASDAQ trading firms to utilize their electronic trading infrastructure to efficiently make competitive markets. The broker-quoted markets provide a valuable service to non-affiliate shareholders that want to get the best possible price for shares they own. However since there is a wide variability in the quality of issuers traded OTC by investors, the broker-quoted OTC markets are an incomplete trading focused market that can be dangerous for unsophisticated investors.A few years ago, we looked at how we could expand from only providing trading services to broker-dealers and create a better marketplace for the higher quality companies traded OTC. In March 2007 we introduced the issuer listed OTCQX marketplace (www.otcqx.com) which allows investor-focused companies use the quality controlled OTCQX listing platform to offer investors transparent trading, superior information and easy access through their regulated U.S. broker-dealers. Companies have the choice of SEC registration or meeting our alternative disclosure guidelines if SEC registration is not required under U.S. securities laws. We use a sponsored community based listing process where pre-qualified investment banks or attorneys provide a professional review of company disclosure.The OTCQX platform started with strong international listing demand, but now as Sarbanes Oxley is coming to smaller U.S. companies, we are building a pipeline of domestic companies as well. In less than two years, OTCQX has grown to over 50 companies and twice the monthly dollar volume of the OTCBB.We think OTCQX is really a game changer for pre-NASDAQ companies that want to engage with investors and provide most of the services that would come with an exchange listing. I would love comments and feedback on what we could do to make it more attractive for both investors and issuers.

  16. basilpeters

    Thanks for another outstanding post, Fred. The secondary market is definitely heating up. I’ve been part of a few transactions where the buyers were angel investors. This provided the founders some early liquidity and allowed the company to grow further before the full exit. In this case study, they did two secondaries that worked very well for eveyone involved: http://www.angelblog.net/Ca

  17. Chris Dodge

    What’s your thinking on insider disclosure when trading over this private market? Should founders be required to disclose when selling their shares in such a market?

    1. fredwilson

      If this is an institutional market (and super high net worth individuals), then I think buyer should drive the disclosure requirements, as it is done in the vc market

      1. D

        Fred, great post! I’m excited to see what comes of all of this. It would also be wonderful if this market would be accessible to non super high net worth individuals. Or if it is high net worth, then it’s still set around a million or two. As you wrote before, there are a lot of big Twitter fans who would love to own shares of stock. It seems like making it accessible to some extent could create an even more active set of users and people who feel they have an interest in the success of the company, so even with a small ownership may go above and beyond to help that company succeed out of passion.

        1. fredwilson

          I hear you about small investors but if the market is open to them, it will be highly regulated which will reduce the attractiveness of this versus the public markets

      2. JLM

        I am wholly supportive of creating any new markets to create liquidity in the marketplace (and as a practicing capitalist, I want CEOs and workers and VCs to make a shit pot of money and to purchase Hinckley picnic boats) and to harness the available technology as a trading platform but I must sound a huge warning as it relates to shifting the burden of disclosure from the company (which possesses all the information) to an investor (regardless of the level of sophistication) who possess only that info that the company rations out.The burden for disclosure of relevant information by the company through periodic filings, annual reports, annual meetings, capital related filings, proxy statements, press releases has been set by the SEC through the relevant provisions of the 1933/34 Acts and Reg FD (Fair Disclosure). This responsibility is at the core of the company’s obligations to ensure that no individual possesses or trades on “material non-public” information — hte HIV/AIDs of the investment world.Ultimately if there is a failure in communication or disclosure, the company is the likely target of litigation and this type of litigation is costly and usually prevails for the interest of the investor.This is a bit different from the VC framework in which the VC has the ability to extract the information as a basis for making the investment under the guise of “due diligence” which is different than buying shares in a, hopefully, going concern.I suspect that in the current environment, the Obama administration will be clamping down on all significant “unregulated” funding mechanisms — like the hedge funds. I expect them to smoke out all kinds of onshore and offshore unregulated businesses and bring them under the SEC. The SEC has to change some rules and make them simpler and tougher. But @ the core it’s simply: “Hey, no cheating! Tell the truth! Be fair!”While I am an unabashed capitalist, I am resigned to and I guess even embrace a level of regulation sufficient to eliminate all the cheaters. I would water board them myself and then behead them.

        1. fredwilson

          Right. I agree. But this is a secondary market. The company is not selling the shares. So why should the company bear the disclosure burden or risk. I think this should be a ‘buyer beware’ market

          1. JLM

            I certainly see the logic of your point and I respect the perspective from which you are viewing the issue.I think another perspective might be that at the end of the day, whether an investor has acquired shares directly from the company or otherwise, companies have a responsibility to ensure the market for their shares is “orderly” and fair because the ownership of a single share — regardless from whence obtained — conveys direct OWNERSHIP in the company.The company has a paramount interest in who owns their stock and some folks should be screened. From a regulatory perspective, one would want to know if the stock is being acquired by a competitor or the Mafia.It serves the company poorly to have shareholders — OWNERS — who were either shanghaied or tricked into ownership.The company has the ability to authorize or forbid secondary trading of its shares by the very restrictions it puts on the legend on the stock certificate itself. Therefore the company — rather than the individual — really decides whether its shares will trade freely or in some truncated form. The stock certificate legend is going to be the initial dictum that somebody reasonable is going to look at to demonstrate prudence and fairness.Remember in many instances if a company were to make a private placement, it would have to seek an independent valuation or a fairness opinion — sometimes to protect the ownership of its employees.If the company sees the value of providing liquidity for its founders, investors and employees then it arguably should shoulder the burden of creating that liquidity which in this instance is full disclosure IAW Reg FD, etc.Further, the Board of Directors of a company serves only and owes its duty only to the shareholders — past, present and future — and not to the management (though management is likely to be both). This fiduciary obligation is often conflicted by the nature of the other loyalties of the Board (perhaps as VC investors, etc).I have found myself in this very situation in a number of instances when asked to serve on a board or when managing an enterprise which has a working board or when running a public company in which I was the largest shareholder, the CEO and a Board member.The only antidote for conflict is full disclosure hence the ponderous Form 13D requirements imposed by the SEC for insiders and large shareholders. Hell, you even have to state your “intentions”!Again, I certainly have a sentimental attachment to your view but fear that the elegant simplicity of that view has flown the coop in the face of an increasingly complex litigation environment.Of course, I am still in favor of settling disputes (business and personal) with duels — so you have to take that into consideration! LOLAnother great topic, BTW! Thanks.

          2. fredwilson

            Excellent points. Which is why most secondaries are done among insiders todayBut I can’t keep buying all the stock from the founders. I’m gonna run out of money! 🙂

          3. JLM

            I agree w/ you completely when the market is limited to insiders like you. You know the company well. Undoubtedly better than the management because you can make a real assessment of the quality of the management. Management cannot see the bald spot on the back of their head.It does serve to remind me that one of the most important elements of partnerships is the “buy-sell” provision.I would also think that there is a unique selling advantage to be created by VCs who are able to bring to a deal the added advantage of being able to provide some liquidity assistance given some specific objective hurdles — cash flow positive, within a couple years of a liquifying event, etc.I can’t begin to tell you the number of loyal relationships I have created through the years by helping employees buy houses, finance weddings, pay for a crisis, pay college tuition. I have always thought that I own whatever problems distract a good man from making me rich. One of the smartest things I have ever done is to create a no interest emergency loan fund — it bubbles all the problems to the surface before they become embezzlement, theft, integrity problems. Hell, it makes me feel good about myself and it relieves the guilt of my own very tenuous success — there but for the grace of God, etc.I think that good guys finish first in the only races that matter — the human race. I hate pricks.

    2. C Coulson

      Insiders need to provide disclosure when selling in the public market regardless of if the Security is SEC registered or not. FINRA recently issued a Notice to Members regarding this:FINRA Reminds Firms of Their Obligations to Determine Whether Securities are Eligible for Public SaleExecutive SummaryFINRA reminds firms1 of their responsibilities to ensure that they comply with the federal securities laws and FINRA rules when participating in unregistered resales of restricted securities. These responsibilities are particularly important in situations where the surrounding circumstances place the firm on notice that it may be participating in illegal, unregistered resales of restricted securities, such as when a customer physically deposits certificates or transfers in large blocks of securities and the firm does not know the source of the securities.Recent FINRA investigations have revealed instances in which firms failed to recognize certain “red flags” that signaled the possibility of an illegal, unregistered distribution. This Notice identifies situations in which firms should conduct a searching inquiry to comply with their regulatory obligations under the federal securities laws and FINRA rules. FINRA also has reviewed procedures provided by a number of large, medium and small firms that are designed to address compliance. This Notice describes and discusses those procedures.http://www.finra.org/Indust

  18. Marc Hedlund

    This is a little beside the point, but I have to say that I thought the line from Claire’s article, “The exit drought ‘is one of the greatest tragedies of our time,’ said David Weild IV,” was embarrassing even to see in print. I wanted nothing to do with our industry when I saw that.I do think that getting away from the current model — where founders are driven to create an exit rather than patiently building the value of their companies — is a very good thing. (For the record, Wesabe’s backers, which include Union Square, are not pushing us in this way.) But let’s not overstate the case.

    1. fredwilson

      I can think of a few tragedies that beat this one marc. Well said

  19. Drew Patterson

    Outstanding and well needed comment. Now how about some regulatory reform that doesn’t treat the options exercise in non-public companies as a taxable event when there is no way or it is very expensive to exercise the options? It’s a real impediment to entrepreneurs leaving large, relatively well-established but private companies to start new ventures.

  20. kidmercury

    these companies need to have a strategy for challenging the SEC/FINRA/govt bureaurcracy. full compliance will result in self-destruction. and possibly nationalization!in my opinion, such a strategy would best be broadcast out in the open, so that support at a grassroots level can be obtained. this can facilitate efforts at altering the regulatory framework.

    1. JLM

      It will be very, very interesting to see what the Obama administration comes up with in this environment — tightening up regulations in a punitive manner to stop the lewd dancing while trying to allow the formation of capital to save the financial industry and to get the job creation dance hall running again. Perhaps this explains why ministers’ daughters are so wild?Right now most market rules (NYSE, NASDAQ) mirror the SEC rules for corporate governance to a level of plagiarism. It will be interesting to see if the markets themselves follow the lead of the SEC, et al.Of course, we do have an international economic crisis, Obama Motors, the Stimulus, TARP, HASP, three wars, torture, health care, immigration, the tax code to deal with — so I am not expecting anything too great to happen any time soon!I am getting a certain sense that the Obama administration would find no problem with rebuilding an airplane engine while in flight. Superman!But, hey, it could just be me!

  21. Healy Jones

    Aren’t small tech IPOs suffering because supposedly there aren’t enough mutual fund investors who want to buy their shares? Who are going to be the buyers in these secondary marketplaces, and if they are so hot to trot to buy shares in small technology companies why haven’t they generated enough interest to help get these same tech companies public? If these buyers aren’t interested in large enough amounts of stock then I fail to see how a secondary market will become big enough to really matter. While it might be nice for a manager or seed investor to dump a few hundred thousand dollars worth of stock it doesn’t really meaningfully change the game for anyone.

  22. David Sifry

    Fred, tell me how this is different than a company actually going public? Would the purchasers of the stock only be allowed from an accredited pool? Aside from that I don’t see how this is much different than the OTC market – wouldn’t companies have to disclose things like their financial statements to prospective stock purchasers, and if not, why wouldn’t this be a secondary market that is rife with fraud?Maybe the better question is, shouldn’t Facebook go public if they want to get liquidity? I agree with you that there’s a larger issue here – that Sarbanes Oxley has created some serious problems with running a small growth-oriented public company and has helped to effectively shot down the public markets, but I’m not sure I see why a secondary private market, if successful, wouldn’t end up with huge abuses given the lack of transparancy…

    1. fredwilson

      You don’t have to file with the securities and exchange commision for your shares to trade on this exchange

  23. Shane

    I think this is an interesting idea for a company on the back-end. I believe that there needs to be something like this on the front-end, when a company is raising money. It would be fantastic for a P2P marketplace, a la Prosper.com, to emerge where early stage companies could raise their start-up capital from a syndication of different investors. The cost of launching web companies these days has gone down to a point where it does not take 3MM in traditional venture capital to go to market. If a company could raise 50K from 20, 50, 100 people, I believe it would foster a much healthier ecosystem. While securities regulation was an absolute necessity in 1934, the flow of information these days is much more advanced, and it seems that investors and entrepreneurs could benefit from such a marketplace.

    1. JLM

      I agree with you and to a certain degree local angel networks exist to provide that funding. I would caution you though I think the level of incompetence, fraud and crime is at an all time high in the money game. This in an environment in which technology is advancing at an exponential rate.Do you think that Madoff and Stanford would have been exposed absent an economic downturn? Or did the economic downturn create such a flood of redemption requests that the Ponzi schemes simply got caught in a plain old fashioned liquidity trap? In both instances, voices could be heard years ago questioning both of these firms — the regulators were not listening or they did not want to listen! Cause Madoff had been President of the NASDAQ and Allen Stanford was a “Sir” — a freakin’ Antiquan knight! LOLOne of the most overlooked issues of small companies is that the management may have a great idea but they may simply not be able to run a company. Some people get 150,000 miles out of a ranch pickup truck and some get 50,000 — it’s all how you run it. The cost is hugely different.

      1. Shane

        I certainly agree with you about the fraud and corruption in this market, and that is something that would be difficult to overcome in a marketplace like I am proposing. There would obviously need to be strict rules governing what people can and cannot do, perhaps even limiting the amount any one person could put into a deal.To address your final point, there is no doubt that management of the investment/company would be a challenge to overcome. Perhaps within the terms of the investment, a board seat or executive management role would be awarded to someone elected by the investor syndicate?

  24. DealGuru

    Isn’t there some precedent here with “ff class ” shares? How do these compare to the current discussion? I’m extremely curious how the “million dollar saturn” as told by venturebeat: http://venturebeat.com/2006… actually work as a starting point.Can the ff class shares be extended generally? Maybe it would be good to get a VC view on ff class shares first then the generalization of it to second market type companies.

  25. Nicholas Lovell

    As a former investment banker and analyst, this just seems like going public without going public.The protections that the SEC and other regulatory bodies put in place are there for a reason. Circumvent those protections, and it won’t be long before some investor screams that they weren’t protected and the SEC will clamp down hard on this practice.Seems shortsighted to me.

  26. Scott

    Anyone hear of Sharespost?Founded by Scott Painter (Zag founder)’s Brighthouse. They’re doing the same thing of brining liquidity to founders/angels: http://www.brighth.com/comp… (scroll to the bottom).Second Market is definitely more built out a la broker/dealer, and of course they make markets in products beyond venture investments (like tasty toxic assets).

    1. fredwilson

      Thanks for that one. I have not heard of them. Yet another secondary market and that’s a good thing

  27. GlennKelman

    I really like this post.But at least at the company that my friends and I co-founded, Plumtree, I noticed that having our stock openly traded from 2002 – 2006 encouraged short-term thinking, as we were always having to consider how investors would react to any change. It is nice to feel at a private company that you can land the plane, fiddle with the engines, and then take off again. And I also like the feeling that we’re all in this together and, however long it takes, nobody gets out alive until we generate a return for everyone.I also wonder if a secondary market essentially gives an employee the ability to take a company public or semi-public. Were the companies mentioned in Claire’s article — Glam, Facebook, Twitter — eager to disclose information about their business, or would they only do it out of loyalty to the employee raising money on the secondary market?At Redfin, when one of our major shareholders wanted to sell his shares to raise capital for another venture — which I agree is exactly the kind of activity the U.S. economy needs — we worried about spending too much time helping him market the sale to interested parties. In the end one of our VCs bought part of his stake. We definitely owed him whatever time it took, but I just wonder where we would have drawn the line if it had been an employee with a smaller stake.

    1. fredwilson

      Great points glennThere’s certainly going to be a lot of issues if this takes off

  28. MonaDeFrawi

    A key factor that led to the demise of the IPO over the past decade is the shift in quality of IPO investors from long-term growth oriented investors — with the same investment orientation as company management and VCs, who create value by building profitable companies — to short-term investors who create value through trading. This factor alone has played a huge role in the stagnating current economics and why solutions like InsideVenture and SecondMarket are absolutely critical for continued economic growth. InsideVenture’s private market platform delivers Quality vs. Quantity by pre-selecting the highest quality, long-term growth QIBs as members, to introduce them to the best, pre-screened companies to facilitate late-stage investment opportunities, via a confidential, due diligence virtual dataroom platform, that builds direct relationships for free flow of information. QIBs, as defined by the SEC, do not need the same “protections” as unqualified buyers, and with full access to both data and management, they are supported in making excellent investment choices.As the investment banking industry consolidated at the end of the last decade, most IPO allocations shifted from high quality long-term investors like T. Rowe Price, Wasatch Advisors, and Capital Group, to hedge funds, which created trading scenarios where 80% or more of IPO allocations would trade within the first 2-30 days of an IPO. Stocks need both stability and liquidity to trade optimally – especially new small cap issues, that have not yet built a critical mass of trading support like an Apple or Cisco, and now no longer have the analyst and trading aftermarket support as we had in the 90’s. Shareholder composition and trading logistics often play as large role in valuation as the company’s actual performance.Silicon Valley has created significant value over the past decade that is blocked from transitioning through a free-flowing capital market system out to public shareholders. This block of value is obviously reflected in the stagnant economy. The good news is that the value is already there…only the capital markets infrastructure is broken. Solutions like InsideVenture’s and SecondMarket’s, bridge the flow of value from private to broader and eventually public ownership, which will be reflected soon through a natural economic rebound.

    1. fredwilson

      Is Inside Venture launched?Great commentThanks!

      1. MonaDeFrawi

        Thank you, Fred, I appreciate your forum for the exchange of important information and perspectives. Yes, InsideVenture launched March 24-26 at our debut investor conference in Santa Barbara. InsideVenture is designed as a next-gen financial marketing utility to connect companies and investors directly, with our first product, our best-of-breed market platform.We have 70 terrific companies on our platform, 45 of whom also presented to our invitation-only member audience in Santa Barbara. This was designed as a transactional conference primarily with a one on one format, with all the companies profiled on the platform with virtual datarooms, powered by IntraLinks, to accelerate conversations and due diligence. We are expanding our buy side membership now to all high quality, long-term small cap fund managers, late stage venture funds, appropriate private equity funds who may be interested in growth equity opportunities, and strategics. These are the folks with the same long-term growth interests as the companies and earlier investors, so all interests are aligned in continuing an orderly transition of the cap table as companies mature and expand their shareholder base. We will soon offer support for public small caps that have been “orphaned” in the market now that sell side analysts have disappeared, and the economics of trading no longer support their aftermarket. For the buy side, we are an excellent research and due diligence tool. For company management, we are a “tool kit” for managing an optimizing their fundraising efforts, with ancillary IR services available on an a la carte basis.. My roots are in investor relations, having managed this important financing function for several newly public venture-backed companies (and private fund raising, in-house, as well) so our company reflects this orientation, and is designed to partner with all the entities (companies, venture firms, institutional investors, support vendors, investment banks, etc.) who are part of the fabric of the capital markets infrastructure and vested in the return of healthy, trading markets.

    2. JLM

      At the core of the issue is whether VC backed enterprises are building great companies, supporting great products, simply fashioning an “exit strategy”, creating a “liquidity event” or something else entirely.It’s easy in the age of greed (which may have ended or at least is summering elsewhere this year) to find fault with folks motivations but I love capitalism and I don’t mean to impugn nor judge anybody’s intentions. That’s the beautiful thing about capitalism, you can do what you want and you can reap the fruit or suffer the consequences — with our own investment capital.When I used to renovate historic buildings — typically the high rises of the 1900-20s — I admit to putting a bit more into a building that I fell in love with (marble v granite, stainless v polished brass, tile v stone, etc.) and thereby making a bit less profit. I wasn’t just tryng to maximize the return, I was trying to breath some magic into the project. It was all selfish because it pleased me more at that instant than anybody else.I hope there are folks today who are building great companies and who are not just trying to wring out another 3% on the IRR. At some point in time, there are only so many tacos you can eat.

      1. fredwilson

        Amen brother

      2. MonaDeFrawi

        JLM, we only feature great companies, pre-screened and pre-selected by our selection boards…a unique strategic advantage that only we offer. I too believe in magic…but that is characteristic to all entrepreneurs, is it not? And it is usually through those truly passionate entrepreneurs who build their companies on something much bigger than just a simple market opportunity, that are the mega-successes. I bet your special buildings sold on the spot, and probably translated into your bottom line after all!

        1. JLM

          You are absolutely right. I probably should have said that they appeared to have garnered less “proforma” profit but I did make a killing when it came time to sell them.I must however admit to getting paid in a different currency. I had one guy who worked for me and we were wired the same and saw the same thing — both trade school grads (how military school grads refer to themselves). After the war he had gotten a masters in architecture and I had gotten an MBA to complement my BS in civil. We used to joke that the buidings owned us rather than the other way around.In about 3 minutes I will leave for my nightly walk with my wife around the lake and through downtown and through the university (Austin, TX) and I will pass the Norwood Tower, the Littlefield Building, the Sampson Building, the Colorado Building, One American Center and the United Bank Tower — all of which own a piece of my heart and my soul. They were all loving mistresses and I will never stop loving them. Don’t tell my wife!

          1. fredwilson

            JLM – I feel the same way about the companies we finance. I hope that came out in my post this mroning

        2. Guest

          I want to be on your “Board”, can I? 🙂 I may not have many talents, but one thing I do know is how to spot a shitty company:http://bit.ly/u2WirOne other note, if I may. You seem very nice and smart, and what you are doing is definitely worthwhile, plus you have a great name… (my young daughter is named Mona, too). However, this polished marketing jargon is a bit off-putting, sorry. What does it mean “we only feature great companies” when, at the same time, you will also be featuring public companies that are being delisted? It sounds like a cliche… What’s so great about those?I bet more substance and less PR-jargon will serve you better.

          1. MonaDeFrawi

            Krassen, thanks for your comment. Our founding partner venture firms who provided initial financing to InsideVenture are our current Selection Board members. We are completing our Series A funding now, and you are welcome to contact me if you are interested. Your excellent “spotting” skills are highly sought after! Our boards will also begin to cycle in new board members annually after year 2, so other opportunities may be available then, as well. InsideVenture was created as an “industry-sponsored” enterprise intended to represent the industry broadly, so all participation is invited and welcomed. I appreciate your advice, as I’m new to blogging, and was only trying to be technically correct. When I referred to the fact that we featured great companies only, I was describing our first product market: our best-of-breed late stage financing and pre-IPO market for long-only investors. The companies were carefully chosen by our Selection Boards whose members have an extraordinary record of backing great companies, Below is a comment from a top Wasatch Advisors Managing Director from PE HUB (http://www.pehub.com/36060/…greg bohlen Says: April 2nd, 2009 at 10:34 amThat was the best private equity conference I have ever been to. Quality of the companies there was off the charts and other investors I spoke with agreed. The headline of “Venture is dead” was certainly off the mark if you spent any time in the one on ones. The community is building some great companies that very few are aware of. If the public won’t buy, all the better to build some great value in high growth companies for a few investors like us.As for our public company services and conferences, they will be focused again on high quality investment opporutnities, not on imminent delistings…Our value add is to be an excellent research tool for the top long term investors, allowing them greater confidence in investing, and to be a support tool for the companies to assist their fundraising and aftermarket support efforts. Hope that provides more substance for you.Say hi to your daughter Mona for me, and assure her that yes, she will grow into her name, eventually 🙂 !

          2. Guest

            What a great response! You are very thoughtful and articulate…And, yes, I was in fact, serious that I would be interested to serve… but of course, your founding partners would never allow it:))I see, for example, Venrock among them, and they are in the algae game big time with Sapphire, which has all the feel and smell of another monumental screw-up. For example, their CEO has made public comments, including testimonies to the U.S. Congress, that they would be able to produce oil for $1.50/gal. At the same time one of their scientific advisers went on record to a reporter from Nature that a more realistic figure would be $6-10/gal.See this article and the comments underneath:http://bit.ly/ROTncI just can’t shake off a bad vibe about this whole thing. I will be OK with having an outspoken and talented communicator like you be in charge of it, and promote the heck ou of it, but only if they provide enough transparency and opportunities for pricks like me to have their say. Knowing VCs, though, I highly doubt it. With GreenFuel, the company I exposed, (funded by Polaris and DFJ), there were even legal threats and intimidation against other scientists…That era is over, though. Many individual investors, who you will be targeting, have been burnt by VCs and mistrust them. No matter how smooth and smart you are, I predict it will be tough to draw them in, if the perception is that the whole thing is tightly controlled by the VCs…Best wishes,

  29. JoeDuck

    Really interesting though I share the disclosure and potential for fraud concerns some are expressing here. It seems to me the “big problem” is that IPOs are so expensive they are not an option for small companies. Might this create a broad marketplace for all interested buyers and sellers no matter how small, while preserving high levels of accountability? If yes it will be great.

  30. Alex Stillwell

    Are any of the VC-backed companies already launched? If so, what are their names?

    1. fredwilson

      I don’t think any have launched yet

    2. MonaDeFrawi

      InsideVenture launched March 24 with 45 companies presenting at our debut investor conference.. 70 companies are on the platform. See more details in response to Fred below:

  31. jaberman

    I agree that there being a market for emerging company shares is a good idea. I wonder though whether it is more likely to be doable in the secondary market, or if it makes more sense in the primary market. The compliance issues for a company to maintain adequate disclosure to avoid antifraud issues are not trivial. Doing that once, at the time of an issuance, rather than all the time (which is what is needed to facilitate a market) seems pretty hard to contemplate for most start ups.Having said that it’s pretty clear that a model where everyone invests and then waits for an exit creates some pretty difficult problems. Founders often need/want liquidity, as do employees, and the venture capital model of raising commitments and then having to get the money back in a relatively short period is also problematic.I think that it might actually be easier for VCs to operate their funds more like mutual funds, with disclosure coming from the venture funds (or at least the disclaimers). With that type of model the interests in a deal could be traded, and the founders could be given a security that could trade along side the VCs interest. This would turn everything upside down, but at least we would be putting the disclosure obligation in the hands of someone experienced enough to manage it, since most of us in the VC industry have a lot more experience dealing with securities laws than the companies we invest in.

  32. Dave Pinsen

    The FT had an article on SecondMarket back in December. I posted about it at the time.

  33. NYCStartupfiend

    Incredibly badly needed. Many entrepreneurs who have already built reasonably successful companies, but have not yet had any liquidity (read: money in their pocket) are likely to become better entrepreneurs after they sell some stock. With the “putting food on the table”, or more likely, putting the kids through college, risk gone, they be psychologically freed to think more boldly and clearly about their strategy. For the investors, employees, and the entrepreneur herself, that might well be one of the most critical levers in creating a massive return instead of a middling one.Of course, the counterpoint is that you don’t want to have an entrepreneur who has already taken so much money out of the business that they are no longer motivated or there remaining motivation to succeed is home run oriented, with prudence thrown to the wind in the process.The latter argument is not unreasonable but FWIW, I think that entrepreneurs whose primary motivation is financial reward instead of the satisfaction of creation and creativity are never particularly great entrepreneurs and will underindex on facing this whole scenario in the first place.

    1. fredwilson

      Totally agree

  34. Noah David Simon

    sounds like a good idea. market sounded a little stiff when it failed. need to have an upstart that allows people to see another viewpoints on the future. if it is a nasty place then you don’t have to sell there. but it sounds like the perfect solution to mark to market rules.

    1. thomasf

      Fred – what a topical post. These comments really show some of the interest and need in the investment community.There really are multiple groups trying to solve this problem – and going after them with different solutions:As mentioned in the article: -NYPPEX – Market for Illiquid Public Securities and Bankruptcy Claims-SecondMarket – a matching system for secondaries – previously focused on the CDO/ARS space, just recently announced entry into the ‘private company space’. They act under the finder’s fee exemption – rule 4 1 1/2 – which means they can introduce different parties to one another, but cannot (should not) help with providing documents or negotiating the deals – http://www.secondmarket.com-InsideVenture – as Mona mentioned – a terrific financial marketing utility that helps facilitate these transactions – launched with a great conference bringing together great pre-screened companies and likely buyers in SB – http://www.insideventure.com-XChange – a new fully functional transaction platform for primary issuances and secondary transactions. The stock market for private companies – no Sarbanes Oxley or class action litigation. Companies can raise capital, investors can sell their shares, and companies stay private (their information and their shareholder count) – http://www.xchanged.comIt will be very exciting to see how this plays out. You can actually see the discussion on this topic in Boston on May 20th at the AlwaysOn Venture Summit East – http://alwayson.goingon.com….All of these comments make some great points – the need is there – companies need a better way to raise capital, VCs need a better way to access liquidity, and the buy-side needs a better way to access high quality companies. The solution today (either M&A or IPO) is broken so it makes sense to either try to fix the existing solutions or create something new. That’s what XChange is doing. Creating efficiency and liquidity in the private market through best public market practices and technology innovations to keep costs down, information quality high, easy transferability, and best assets.

      1. fredwilson

        There are a few more in addition to this list but thanks for leaving this commentI should do a follow up post and list all of them

  35. Peter

    Entrepreneurs will start companies, when there is no path to liquidity on the company stock. You are utterly misguided. The first joint-stock company was launched only in 1602 (the VOC, the Dutch East India Company).How do you think family businesses got started? There are still huge businesses, worth billions, that are entirely family owned.When my aunt died, my father had to execute the heritage and we bounced into many unlisted stocks in public companies. You then had to write to those firms to receive either a valuation or to sell them. If you wanted to sell the shares those companies wrote letters to other shareholders to state which volume was an offer and sollicit a bid.Off course the firm could also try to acquire the shares themselves to add to the agio reserves.Somehow, this article looks to me as a VC who discovers centuries old practices and presents them under the wrong name (secondary market), where it is actually the primary market!How do you think all those family businesses handle the heritage when the parents die and the firms shares have to be divided over the siblings????

  36. W. Ayer

    Look at the Private Equity Exchage (www.peqx.com). It was the first to provide an electronic secondary market for such shares over a year. Accredited investors only.One note on the secondary market- you must be an accredited investor to participate in buying or selling restricted shares on the websites. Most employees are not.Non-accredited investors would have to go through a filing with the SEC.

  37. laurenmeyers

    Back in 2000 I had worked with a startup similar to Second Market. While the the concept of a secondary market for illiquids makes logical sense, it is a difficult nut to crack. For venture funds the general partners typically restrict trading of interests, they will not allow public disclosure of their portfolio companies, and valuing the private portfolio companies is a guessing game. The logical market for these interests are other fund investors that will already be familiar and privy to the portfolio information. Typically the GP will quietly facilitate this type of transfer for LPs that need out. The GP will not disclose the transfer price depriving other investors the opportunity to mark to market.

    1. fredwilson

      Agreed. But the times are slowly changing. Maybe not fast enough for the current crop. But I’m hopeful

      1. laurenmeyers

        I worked with company called PrivateTrade back in 2000–secondary market for private equity. PrivateTrade along with half dozen competitors no longer exist. We had briefly aligned with OpenIPO which still exists as pet project of its deep pocketed founder. These open markets are necessary but it is going to take regulatory intervention or push of some large institutional investors to make these secondaries viable.

        1. fredwilson

          I like the idea of getting some large institutions behind this movement