5 ms·

A Second Market is Emerging: Marketplace for Private Company Stock

37 points by dwynings 18y ago

ivankirigin 18y ago
The note about Facebook common stock valuation is interesting.
danteembermage 18y ago
I wonder, has YCombinator considered creating one of their own? The number of portfolio companies (it never occurred to me until just now how possessive that terminology is) by now must be quite large so there would be a wide variety to choose from and there are probably accredited investors that would be willing to piggyback on the YC certification mechanism and let the founders cash out a little bit. In fact, if the markets became liquid enough you might be able to skip the whole "round" feature of entrepreneurial finance all together and just release shares into the marketplace as needed on a week by week basis. There are, of course, a bucketful of practical problems, and a truck-full of legal problems (the kind that get you in jail for violating securities laws) but in principle it could be worthwhile to do. I suppose if you take that thinking to the logical extreme than any random small business could bring shares to market and the entrepreneur and investors can decide through the market mechanism whether they can deal. That would be an interesting world to study finance in.
- eru 18y ago
  Perhaps if your startup A is legally owned by an offshore company B in your possession. Being in a suitable juristdiction, B could then sell small chunks of A. Would that be even remotely feasible?
- baguasquirrel 18y ago
  Are you sure we could skip the "round" feature of entrepreneurial finance? It is a classic problem in market economics: whenever you deal with low volume, unique items, you won't have enough information to set a fair price. Market economics don't really work until you have a real market around a single item, whether it be pork bellies or Google stock. More broadly, anytime the economic stakes of a transaction goes up, you'll often have the whole bargaining/negotiations spiel (e.g. cars and Oriental carpets). But the cause in that case is due to the cost efficiency of paying professional negotiators to extract more money out of the average consumer.
rfreytag 18y ago
What happens when the lawyers get a hold of this?
braindead_in 18y ago
What are the legal implications? Can you openly trade shares in your private company in such a market?
- bwd 18y ago
  Check out the Wikipedia article on the Securities Act of 1933: http://en.wikipedia.org/wiki/Securities_Act_of_1933 http://en.wikipedia.org/wiki/Securities_Act_of_1933 The SEC publication on rule 144 is also pretty accessible to people who are not lawyers and do not work in the securities industry: http://www.sec.gov/investor/pubs/rule144.htm http://www.sec.gov/investor/pubs/rule144.htm
- ojbyrne 18y ago
  The NYT article linked to has more details. Basically "The new market will be open only to accredited investors and qualified institutional buyers."
  - ivankirigin 18y ago
    The real question is about the sellers. It might evoke Bubble #1 mindsets, but raising money by selling stock openly (in this case, not an IPO) could be a good way to go.
mshafrir 18y ago
The "explore our markets" section of the SecondMarket site immediately evoked "parked domain advertising".
rjett 18y ago
From the NYT article..."For one thing, it could be a thin market, on both sides of the trade. The Securities and Exchange Commission allows the trading of unregistered securities, but only for select investors. The new market will be open only to accredited investors and qualified institutional buyers, which the S.E.C. defines as financially sophisticated enough to invest in high-risk securities about which there is little public information. These include individuals whose net worth exceeds $1 million and institutions that manage at least $100 million in securities." Understandable...but, drats. There are more than a few startups I would be interested in investing in, but I don't qualify as an accredited investor.
joshu 18y ago
One big problem, in my mind, is that lots of nonpublic companies have additional rights attached to stock, especially if it's preferred shares. For example, an employee selling shares might have to offer the shares to the company and the other shareholders before selling to anyone else, etc. I find the naming interesting as well. IPO's are the primary market; the stock markets themselves are already the secondary market.
- joshu 18y ago
  There's a bit in Fred's comments about dealing with the Right of First Refusals (ROFR)

37 points by dwynings 18y ago

The note about Facebook common stock valuation is interesting.

I wonder, has YCombinator considered creating one of their own? The number of portfolio companies (it never occurred to me until just now how possessive that terminology is) by now must be quite large so there would be a wide variety to choose from and there are probably accredited investors that would be willing to piggyback on the YC certification mechanism and let the founders cash out a little bit. In fact, if the markets became liquid enough you might be able to skip the whole "round" feature of entrepreneurial finance all together and just release shares into the marketplace as needed on a week by week basis. There are, of course, a bucketful of practical problems, and a truck-full of legal problems (the kind that get you in jail for violating securities laws) but in principle it could be worthwhile to do. I suppose if you take that thinking to the logical extreme than any random small business could bring shares to market and the entrepreneur and investors can decide through the market mechanism whether they can deal. That would be an interesting world to study finance in.

eru 18y ago
Perhaps if your startup A is legally owned by an offshore company B in your possession. Being in a suitable juristdiction, B could then sell small chunks of A. Would that be even remotely feasible?
baguasquirrel 18y ago
Are you sure we could skip the "round" feature of entrepreneurial finance? It is a classic problem in market economics: whenever you deal with low volume, unique items, you won't have enough information to set a fair price. Market economics don't really work until you have a real market around a single item, whether it be pork bellies or Google stock. More broadly, anytime the economic stakes of a transaction goes up, you'll often have the whole bargaining/negotiations spiel (e.g. cars and Oriental carpets). But the cause in that case is due to the cost efficiency of paying professional negotiators to extract more money out of the average consumer.

rfreytag 18y ago

What happens when the lawyers get a hold of this?

braindead_in 18y ago

What are the legal implications? Can you openly trade shares in your private company in such a market?

bwd 18y ago
Check out the Wikipedia article on the Securities Act of 1933: http://en.wikipedia.org/wiki/Securities_Act_of_1933 http://en.wikipedia.org/wiki/Securities_Act_of_1933 The SEC publication on rule 144 is also pretty accessible to people who are not lawyers and do not work in the securities industry: http://www.sec.gov/investor/pubs/rule144.htm http://www.sec.gov/investor/pubs/rule144.htm
ojbyrne 18y ago
The NYT article linked to has more details. Basically "The new market will be open only to accredited investors and qualified institutional buyers."
- ivankirigin 18y ago
  The real question is about the sellers. It might evoke Bubble #1 mindsets, but raising money by selling stock openly (in this case, not an IPO) could be a good way to go.

mshafrir 18y ago

The "explore our markets" section of the SecondMarket site immediately evoked "parked domain advertising".

rjett 18y ago

From the NYT article..."For one thing, it could be a thin market, on both sides of the trade. The Securities and Exchange Commission allows the trading of unregistered securities, but only for select investors. The new market will be open only to accredited investors and qualified institutional buyers, which the S.E.C. defines as financially sophisticated enough to invest in high-risk securities about which there is little public information. These include individuals whose net worth exceeds $1 million and institutions that manage at least $100 million in securities." Understandable...but, drats. There are more than a few startups I would be interested in investing in, but I don't qualify as an accredited investor.

joshu 18y ago

One big problem, in my mind, is that lots of nonpublic companies have additional rights attached to stock, especially if it's preferred shares. For example, an employee selling shares might have to offer the shares to the company and the other shareholders before selling to anyone else, etc. I find the naming interesting as well. IPO's are the primary market; the stock markets themselves are already the secondary market.

joshu 18y ago
There's a bit in Fred's comments about dealing with the Right of First Refusals (ROFR)