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A new private trading platform for restricted securities: Liquidity for accredited investors at what price?

Pre-IPO Investing

A new private trading platform for restricted securities: Liquidity for accredited investors at what price?

By:Robert Rapp, Calfee, Halter & Griswold LLP

Posted: 05/08/2013

On March 6, 2013, NASDAQ OMX Group, Inc. announced a joint venture with SharesPost, Inc. to launch a new secondary markettrading platform for the purchase and sale of private company securities. The new marketplace, to be called The Nasdaq Private Market (NPM,) will be a private market for resales of restricted securities, with the main objective of providing increased liquidity for early investors, founders, and employees of private companies by enabling the efficient buying and selling of private company shares. Subject to regulatory approval, NPM is slated to become operational later in 2013. The new private trading platform presents an opportunity for accredited investors who have held restricted securities of a private company for at least one year to exit their investments. NPM will compete with other established electronic trading platforms, most prominently SecondMarket Holdings, Inc. (“SecondMarket”), that have with varying degrees of efficiency operated private markets for the purchase and sale of illiquid restricted securities by accredited investors.

Accredited investors holding restricted securities of private companies have historically faced the regulatory reality that, having acquired their securities in transactions for which no registration statement was filed by the issuer under Section 5 of the Securities Act of 1933 (the “Securities Act”), they may not resell their shares (“restricted securities”) except pursuant to an effective registration statement or an exemption from registration. Any resale of restricted securities presents a risk that the seller will be deemed to be a statutory underwriter, and as such, may not rely on the exemption from Securities Act registration requirements otherwise provided by Section 4(a)(1) of the Securities Act for transactions by any person “other than an issuer, underwriter or dealer.” To address the issue, SEC Rule 144 under the Securities Act, adopted in 1972, established a safe harbor through which private sales of restricted securities can be made without the risk of underwriter status, and to ensure the availability of the Section 4(a)(1) exemption from registration. Depending on the status of a seller as an affiliate (control relationship) or non-affiliate of the issuer, Rule 144 imposes conditions on resales, including a holding period, and other amount and manner of sale restrictions.

In 2007, Rule 144 was amended to permit non-affiliate holders of restricted securities of a private company to resell their shares after a one year holding period, free of any other restrictions or requirements. The change in regulatory landscape meant that non-affiliate accredited investors satisfying the one year holding period were, unless otherwise restricted by the issuer, free to seek out a path to liquidity. However, no well-developed  secondary “market” for the sale and purchase of restricted securities existed.

Certain types of web-based systems to facilitate transactions restricted securities have existed since 1996, when the SEC Staff first approved what amounted to “passive bulletin boards” –systems posting information to prospective buyers and sellers of restricted stock that enabled them to effect transactions by direct personal contact between them independent of the Internet facility that brought them together. These facilities served only an informational or listing function, and played no role in effecting actual transactions between participants. Some operated on a subscription or fee basis. The key to their regulatory approval, however, was the facilitation of direct interaction between participants, in almost all cases issuers and pre-qualified accredited investors having password protected access to the facility. The focus was not on true secondary market trading by qualified investors in restricted securities of “listed” private companies. And in any case, the strictures of SEC Rule 144 rendered a secondary market trading platform for restricted securities problematic without regard to other regulatory issues.

Other electronic platforms emerged specifically to facilitate purchases and sales of illiquid assets, including private company stock. SecondMarket, which began in 2004 as “Restricted Stock Partners,” first addressed the need for liquidity for holders of restricted securities of, at the time, public companies. SecondMarket established a market for restricted stock of private companies in 2009 — bringing together buyers and sellers in a centralized, transparent on-line marketplace. SharesPost Inc. and others likewise emerged as web-based platforms for secondary market transactions in restricted securities. In 2007, NASDAQ itself launched the “PORTAL Market” as a trading market for unlisted securities available to an elite class of investing institutions –“Qualified Institutional Buyers” (QIBs)–having at least $100 million in assets. However, in 2008 the PORTAL Market ceased operations, with NASDAQ moving instead to a consortium that controls and operates an electronic platform for over-the-counter trading in restricted securities by QIBs.

In their fairly short evolution, in addition to providing electronic trading platforms, both SecondMarket and SharesPost moved increasingly to facilitating private company capital formation through private firm access to pre-qualified accredited investors.  Prequalification of accredited investors for access to these markets presents a greater challenge today as the SEC grapples with rulemaking implementing accredited investor status “verification” requirements under Regulation D of the Securities Act that must go beyond former pre-qualification procedures based on questionnaires and self-accreditation procedures for accessing the on-line platforms. These markets also expanded to assist private growth companies in the creation of issuer-controlled shareholder liquidity programs, which is also an announced aim of the NPM in enabling a private company to control the marketplace for its shares.

The announced joint venture between NASDAQ OMX Group, Inc. and SharesPost, Inc. to create the Nasdaq Private Market is aimed specifically at providing improved access to liquidity –enabling the efficient buying and selling of private company restricted shares. A driving consideration behind NPM is the fact that an increasing number of private companies are choosing to remain private longer. The impetus for doing so is even stronger today in the wake of the Jumpstart Our Business Start-Ups (JOBS) Act, which significantly increases the shareholder threshold for companies to remain private. Under the JOBS Act private companies may have up to 2000 shareholders (1500 of whom must be accredited investors), up from the previous 500 shareholder threshold. In this environment, both NASDAQ and SharesPost have emphasized the need for an efficient means to access liquidity for private company employees and investors.

A key consideration in the establishment of NPM, as it has been previously for other secondary market trading platforms, is control by the issuer of the marketplace for its shares, in both the design and implementation of “liquidity programs.” SecondMarket, for example, has emphasized that companies have full control over which accredited investors are allowed to buy their stock. Among other things, companies can set limitations on the total amount of shares any single investor may purchase. Companies may also decide who can sell shares, limiting the program to certain investors, for example. Companies may also decide when transactions –liquidity events– may occur, and may formulate a mechanism to determine the price per share that all buyers will pay and all sellers will receive.

With the strong emphasis on issuer control over the secondary marketplace for restricted shares, NPM may actually erect a practical barrier to its effective operation. Although non-affiliate accredited investors are free from Rule 144 restrictions and conditions in reselling their securities after satisfying the one year holding period, private issuers, in establishing liquidity programs implemented through NPM, may impose significant restrictions on resales.  In addition to the kind of restrictions noted above, issuers might, for example, limit resales only to sales to current shareholders, or require the sale of all of one’s current holdings. The issuer might require granting the company a right of first refusal, all in the name of controlling the marketplace for its shares. A secondary trading market accessible by accredited investors becomes markedly less attractive in the face of such restrictions that interfere with its efficient operation.

It is also true that NPM will operate in an informational void. Private companies have no obligation to the marketplace to disseminate information concerning their business and financial position, and accredited investor participants in the market have no right to obtain it from such issuers. The price discovery function of markets is negatively impacted, if not prevented from operating at all. Recent history illustrates the problem. Ahead of the ill-fated initial public offering, restricted shares of Facebook traded in an on-line secondary market at prices far away from the value assigned by an open and efficient post-IPO market.

It remains possible that NPM will impose basic information dissemination requirements as a qualification for “listing” restricted securities for trading, but the fact is that participants in this market are likely to have limited and unequal access to information upon which to make a reasoned value determination and investment decision. In the private offering setting, accredited investors are presumed to be able to fend for themselves in the course of direct interaction or prior relationship with an issuer, or the ability to obtain or require disclosure of material information. However, NPM, as with currently operating on-line secondary trading platforms, will be accessible by any verified accredited investor, the universe of which encompasses investors with no means to have, acquire or know necessary information on which to make a reasoned investment decision and in doing so, bring about a fair value determination in the marketplace.

The emphasis on providing liquidity for early investors, founders and employees of private companies in establishing NPM, and, as NASDAQ and SharesPost announced, establishing “the preeminent marketplace for private growth companies” is laudable.  Indeed, the liquidity function of markets, along with price discovery, is critical in all settings.  If NPM is truly to be a step forward, however, the market must function unfettered by artificial constraints or restrictions, and must to the greatest extent possible require the creation and dissemination of information to participants, and allow the free interaction of qualified sellers and buyers.  The new market should not exist principally to support private company liquidity “programs” or to assure private company “control” of the marketplace for its shares. If there is to be an efficient means for private company employees and investors to access liquidity, and if a more efficient private market is to be created based on market operating expertise and combined technological resources of NASDAQ OMX Group and SharesPost, it should be one that operates freely and fairly.


Robert N. Rapp (B.A., J.D., Case Western Reserve University; M.B.A., Cleveland State University) is a partner in Calfee, Halter & Griswold LLP, Cleveland, Ohio, and is Adjunct Professor of Law (“Law, Theory and Practice in Financial Markets”) at the Case Western Reserve University School of Law.

To further our ongoing commitment to present a diversity of perspectives about alternative investments, AIMkts is proud to share this exclusive content. The opinions expressed here are those of the author and do not necessarily represent the opinions of Accredited Investor Markets.

NASDAQ Private Market Expands Senior Leadership Team

Carine Schneider to Head Equity Management Solutions

Cyndi RodriguezAppointed Chief Legal Officer

NEW YORK and SAN FRANCISCO, Nov. 22, 2013 (GLOBE NEWSWIRE) — NASDAQ Private Market, LLC (NPM) announced today two new appointments to its senior leadership team: Carine Schneider will head NPM’s Equity Management Solutions and Cyndi Rodriguez will serve as Chief Legal Officer. Both will be based in San Francisco. NPM will be the new capital market for leading private companies, bringing unprecedented efficiency, transparency and scale to the marketplace.

“We are excited to have Cyndi and Carine join NPM as we develop this market with Cyndi’s strong regulatory background and Carine’s expertise in equity plan management,” said Greg Brogger, President of NPM. Ms. Schneider and Ms. Rodriguez will report to Mr. Brogger, and Ms. Rodriguez will also report to Edward S. Knight, Chief Regulatory Officer and General Counsel, NASDAQ OMX.

“NASDAQ OMX has a deep history of supporting the growth and development of the world’s most innovative companies for their entire life cycle,” said Bruce Aust, Executive Vice President, Corporate Client Group, NASDAQ OMX. “NPM will be the first of many ways by which we can partner with and provide value to private companies.”

Ms. Schneider is an industry veteran with established leadership in equity plan management. She will work directly with NPM’s corporate clients to enhance the management of their employee equity plans and capitalization table software solutions, and integrate them into NPM’s equity management solution. Ms. Schneider was previously the CEO of EASi, a leading provider of global stock plan tracking and reporting software; co-founder and CEO of Global Shares, an independent provider of global stock plan administration services; and a Partner with PricewaterhouseCoopers. She has also held senior level management positions with Morgan Stanley, Towers Watson, and Oracle. Ms. Schneider received her bachelor’s degree from the University of California, Santa Cruz.

Ms. Rodriguez joins NPM from the U.S. Securities and Exchange Commission. She will oversee regulatory compliance, interact with companies exploring their capital and security transaction needs, and lead NPM’s participation in policy issues affecting the private capital market. While at the SEC, Ms. Rodriguez held various senior positions including the Deputy Chief of Staff, Counsel to SEC Commissioners, and Special Counsel in the Division of Trading & Markets. She advised and helped implement various policy and rulemakings, including those under the Jumpstart Our Business Startups Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act. Ms. Rodriguez also worked in private practice. Ms. Rodriguez earned a J.D. from The University of Texas School of Law and a Bachelor of Arts from The University of Texas at Austin.

About NASDAQ Private Market:

NASDAQ Private Market, LLC (NPM) will be the new capital market for leading private companies. Through its affiliated multi-broker-dealer network and partners, NPM will connect companies with a global community of investors, and provide an integrated equity solution to manage everything from structured liquidity programs to stock plan administration. Whether a company seeks to optimize an eventual IPO or remain private permanently, NPM will provide complete capital market support to meet its needs. For eligible investors and shareholders, NPM will be a place to discover and engage with some of the most exciting private companies.

Securities related services will be offered through a registered broker-dealer and alternative trading system affiliated with NPM called NPM Securities, LLC (NPMS). NPMS is currently undergoing the regulatory application process and is not yet in operation. Securities offered through NPMS are not listed or traded on The NASDAQ Stock Market LLC.


The inventor of the electronic exchange, The NASDAQ OMX Group, Inc., fuels economies and provides transformative technologies for the entire lifecycle of a trade-from risk management to trade to surveillance to clearing. In the U.S. and Europe, we own and operate 26 markets including 3 clearinghouses and 5 central securities depositories supporting equities, options, fixed income, derivatives, commodities, futures and structured products. Able to process more than 1 million messages per second at sub-40 microsecond average speeds, our technology drives more than 80 marketplaces in 50 developed and emerging countries into the future, powering 1 in 10 of the world’s securities transactions. Our award-winning data products and worldwide indexes are the benchmarks in the financial industry. Home to more than 3,300 listed companies worth over $7 trillion in market cap whose innovations shape our world, we give the ideas of tomorrow access to capital today. Welcome to where the world takes a big leap forward, daily. Welcome to the NASDAQ OMX Century. To learn more, visit Follow us on Facebook ( and Twitter ( (Symbol: NDAQ and member of S&P 500)

The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Neither The NASDAQ OMX Group, Inc. nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding NASDAQ-listed companies are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.


CONTACT: NASDAQ Private Market Media Contact:
         Jeremiah Hall
         (415) 349-5016

         NASDAQ OMX Media Contact:
         Joseph Christinat
         (646) 441 5121
         joseph.christinat@nasdaqomx.comWill Briganti
         (646) 441 5012

Source: NASDAQ Private Market, LLC

This article appears in: News Headlines

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

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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.

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.

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.”

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.”

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.

“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.”

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.