These unregistered securities are only open to qualified institutional buyers or QIBs such as mutual funds and hedge funds that manage at least $100 million in assets.

All of the investment banks joining the Portal Alliance had either launched or are working on trading platforms for trading unregistered securities, a booming market where an estimated $1 trillion was raised in global fixed income and equity deals through the first half of 2007.

The founding members of Portal Alliance include Goldman Sachs, which launched its own platform GSTrUE last year, Bear Stearns which created Best Markets, and JP Morgan whose platform is called 144 Plus and Wachovia Securities. Also joining is Opus-5 (The Open Platform for Unregistered Securities), a consortium formed by eight leading investment banks whose members include Bank of America, Citi, Credit Suisse, Lehman Brothers, Merrill Lynch, Morgan Stanley, UBS and Wachovia Securities.

The investment banks launched these proprietary platforms to raise money for private companies through unregistered securities, a booming market without the regulatory glare that’s entailed with going public. They also hoped to automate what has been a telephone-based market that has lacked transparency and liquidity.

However, the proliferation of 144A equity trading systems had the potential for fragmenting the liquidity and sending the investors into competing platforms. “It got to be confusing for the marketplaces we said why don’t we get together,” says John Jacobs, EVP Nasdaq Stock Market in an interview today. “You think about the investor wanting to sign up for multiple systems, trading could have been fragmented,” says Jacobs.

Also, the investment banks have done only a handful of deals on their own platform. When Nasdaq launched its electronic trading platform on Aug. 15, it had 607 equities and two QIBs participating; now it has over 700 equities and 97 QIBs. So Nasdaq has added nearly 100 equities since going live, says Jacobs. There’s only been three tracked deals, two in GSTRue and one in Best Markets, he notes.

One reason that the banks may have formed their own electronic platforms is that with 144A securities, issuers must track the number of shareholders. There can only be up to 499 shareholders for an unregistered U.S. company. If the number were to go above that, the company would need to register its shares with the Securities and Exchange Commission (SEC). For example, Opus-5 was using the back-end developed by Bank of New York Mellon; while Goldman Sachs was using American Stock Transfer (AST), and Nasdaq was putting the deals through DTCC for clearance and settlement.

Another reason for the consolidation is that the investment banks were already bringing their deals that didn’t require tracking into Nasdaq Portal. Not all the 144A deals require shareholding tracking, says Jacobs. “The debt deals don’t need tracking, the non-U.S. deals have exemptions they can rely on and most of the U.S. (144A) equity offerings plan to register as public companies," he notes.

While each of the proprietary systems had developed their own shareholder tracking systems, they still had to develop the front-end trading system. “They talked to us about making us the front-end,” says Jacobs. Conversely, Nasdaq had built the trading and the registration piece for QIBs and Portal securities, but didn’t have the back end. “We had to build tracking. It started to make total sense to bring it all together,” says Jacobs. “We reduce shareholder confusion,” he says.

“Today’s announcement was the recognition that it doesn’t make sense to have five or six different record keeping and clearing systems,” comments Barry Silbert, founder and CEO at Restricted Stock Partners in New York. RSP has built an electronic trading platform for trading restricted stocks – including public companies that issue private placements, employee stock options and warrants. "And Nasdaq as a marketplace is a good front-end (on which) to trade these things," continues Silbert. The question is which back-end system is going to be used by Portal, says Silbert. “Is it going to be Bank of New York Mellon or DTCC or is it going to be both,” asks Silbert.

According to Jacobs, as the Portal Alliance gets more definitive, the group will pick which tracking solution — whether it wants Opus BNY or American Stock Transfer, which does shareholder tracking for Goldman’s GSTrUE. “In the near term, Portal Alliance is going to hook into GSTrUE and Opus-5 and everything else,” according to Jacobs. “The long term is to pick best-of-breed,” and longer term, Portal Alliance will decide whether to continue to offer that as a solution or whether DTCC will build something, he says. Typically the 144A securities are cleared through DTCC, but the tracked deals don’t use DTCC, he says.