March 07, 2013

Nasdaq OMX Group Inc plans to create a market for trading shares of unlisted companies in a joint venture with trading platform SharesPost Inc, tapping into increasing investor interest in private firms.

The new venture, Nasdaq Private Market, may help Nasdaq's main exchange capture a greater share of listings from rival NYSE Euronext when companies go public, said Josef Schuster, founder of Chicago-based financial services firm IPOX Schuster LLC. "NYSE was taking a lot of share away from the Nasdaq even in tech listings, so I think it's kind of an opportunistic move for Nasdaq," he said.

SharesPost now lists more than 200 private companies, including Pinterest, Foursquare, eHarmony and Tumblr.

Nasdaq will own most of the new venture, which will be based in San Francisco and led by SharesPost founder Greg Brogger. They hope to launch the new market later this year. Nasdaq needs regulatory approval to run a broker-dealer and an alternative trading system, said Bruce Aust, executive vice president at the exchange operator.

New York-based Nasdaq has been talking to companies ranging from venture capitalists to fund companies, and including 30 to 50 private businesses, over the past year about the idea, Aust said.

SharesPost, based in San Bruno, California, began in 2009. Its fortunes rose in step with technology startups such as Facebook Inc and LinkedIn, which traded on the market before they went public. But it ran into regulatory trouble when the U.S. Securities and Exchange Commission (SEC) stepped up scrutiny of Wall Street banks and electronic markets offering investors a chance to trade shares in hot technology companies before they went public.

Privately held SharesPost was charged by the SEC for failing to register as a broker-dealer before offering securities in its marketplace. It registered as a broker-dealer and paid $80,000 to settle the allegations, while Brogger, the company's founder, paid $20,000.

COURTING THE BUY SIDE

The catalyst was the Jumpstart Our Business Startups Act (JOBS), passed last March, which increased opportunities for trading unlisted companies, Nasdaq's Aust said. Specifically, the law increased the amount of shareholders an unlisted company can have to 2,000 from 500.

"We feel that 2,000 shareholders could be a very good shareholder base, and we talked to the buy-side community, and we think there is a lot of interest in private markets and secondary markets," he said.

Bringing more "buy-side" or fund companies into the mix adds a huge pool of capital to the private market, making it easier for investors to exit, including making it easier for employees who may have a large portion of their compensation tied to shares to sell them when they need to.

The new venture gives SharesPost a leg up in the increasingly crowded market for trading unlisted stocks, said Jay Ritter, a finance professor at the University of Florida.

"Most young companies that go public in the U.S. go public on the Nasdaq, and so the joint venture gives SharesPost a lot of credibility," Ritter said. SharesPost's broker-dealer and investment advisory business will continue to operate separately from the joint venture.

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