Nasdaq, SharesPost take private markets semi-public with new SF-based venture

Nasdaq is synonymous with publicly traded securities. Now, the exchange is getting into privately traded companies as well with a little help from private-equity marketplace SharesPost.

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The new project, Nasdaq Private Market, is a joint collaboration between Nasdaq OMX, which owns and operates the renowned stock exchange, and SharesPost, where individuals and investors can swap shares of private companies for cash. With this new market, investors will be able to buy equity in still young, privately held companies in some of the world’s hottest verticals.

You wanna buy shares of Pinterest? Twitter? Square? Dropbox? Palantir? Wanna buy them from employees before the company gets acquired or makes its IPO? Right now, you can do that on SharesPost, as long as you meet a few basic requirements as an accredited investor. And now, it looks like you’ll be able to do something similar through the new, Nasdaq-approved channel.

The Nasdaq Private Market (NPM) is a joint venture between the two entities, leveraging Nasdaq’s brand recognition and domain expertise with SharesPost’s online platform and access to top-shelf private companies.

“The market participants are craving a recognized brand,” a Nasdaq spokesperson said in an interview with VentureBeat this morning. “We’ve been doing this for 40 years, providing control and reach to a wider audience in the broker and dealer community. And we have a lot of resources to build out significant features to bring a lot of efficiency to this market that doesn’t exist today.”

So, why did Nasdaq pick SharesPost, just one in a small group of second-market companies for trading privately held company shares?

“They’ve been solely focused on companies,” said the rep. “Their competitors have extended into art and wine and loans — a host of things. And Nasdaq has also been all about the companies.

“Secondarily, they’ve simply got the best technology.”

Why private companies want in

Given the swarm of activity and hype around privately held companies like these, especially tech-sector startups, it’s no wonder that Nasdaq wanted in on the action. And the past year’s crowdfunding hoopla has only increased that urgency.

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Plus, as SharesPost managing director Sven Weber pointed out in a recent VentureBeat interview, plenty of startups are seeing the value in keeping their companies private.

“We’ve seen an emergence of a private market. You can have shareholder liquidity programs where people can get cash out,” he said.

“Control is an advantage in the market,” he continued, stating that private companies “can control what information is out there. … That’s why a controlled marketplace is important for these companies. I have control who’s my shareholder, and not other investors. I want to have people on the board who are long-term committed.

“That is the private marketplace — for companies to really keep that process and manage it from a corporate perspective.”

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For relatively new companies still proving their own business models, an entry to public markets can be as tumultuous and terrifying as it is exhilarating and potentially profitable. Take Facebook: A rocky start with Nasdaq saw shares wobble before quickly plummeting below $20 per share — less than half their price on the private market just the day before the IPO.

Or look at Groupon. Or Zynga. The trading floor is not always kind to Internet heroes. And privately held companies are starting to realize this and consider other options.

“Coupled with the recent reports that Nasdaq itself was considering going private, this announcement is a telling admission that companies increasingly wish to avoid the casino-like atmosphere of the U.S. public markets,” said a rep from SecondMarket, a SharesPost competitor.

“This latest effort by Nasdaq to enter the private markets is a validation of the model that we have developed over the past five years. … A reinvented stock market controlled by companies, not high-frequency traders, is the preferred path for the country’s most innovative companies.”

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With the NPM, companies will have control over every aspect of a trade. Whether they’re listed on the NPM in the first place, who can sell, who can buy, the amount of equity that changes hands, and even the timing of each deal is controlled by the company.

Why new investors should stay out

But while keeping a company private sounds like good risk management from a founder’s perspective, the deal can be a lot riskier for potential investors. And due to the nature of web startups in these hype-driven times, early-stage mobile and Internet companies are attracting a lot of ill-informed investors to some of the most volatile markets in existence.

As Bob Ackerman, one of the founders of Allegis Capital, a San Francisco investment firm, said in a recent interview with VentureBeat, “Whenever it’s easy to start something, a lot of inexperienced people are going to pile in both as entrepreneurs and as investors, which makes a bubble.”

Ackerman points out that private investment in the form of angel and seed deals enables a certain class of homework-doing human to get equity in these companies at a great value. But on secondary markets, where employees, not necessarily founders, are just trying to get liquid fast, a lot of equity sales happen without the due diligence and disclosures associated with early-stage institutional financing.

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“There are people who invest where they have tremendous area knowledge and experience and separate the wheat from the chaff,” Ackerman told us. “But doing it because everybody’s doing — boy, that’s a recipe for trouble.”

“Anytime you have restricted shares, it needs to be restricted to QIBs [qualified institutional buyers] and accredited investors,” said a source close to the SharesPost-Nasdaq deal.

And as far as mitigating potential risks, the NPM will also be working solely with companies that have at least some proof in the marketplace. “We’ll be nowhere near the crowdfunding end of the spectrum,” said our source.

“We’re not going public with how the NPM will work, but you can envision that qualifying standards will exist and will be tailored to companies that are much more upstream, that had taken several rounds of funding, and that have revenues coming in.”

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SharesPost plans to keep its current broker-dealer and adviser business separate from the new project. Pending approval from federal regulators, NPM is set to launch later this year . SharesPost chief executive Greg Brogger will act as president for the venture, which will be based in San Francisco.

Additional reporting by Christina Farr. Image credit Nasdaq.