Where Are All The IPOs? Private Stock Exchanges, Of Course
This year has been undeniably slow for any investor looking for IPO activity. Just over a dozen companies have gone through a 2009 IPO, compared to 35 last year. The trend to inactivity hasn’t been stopped, despite rising stock prices. Oddly enough, IPOs are booming in private markets, where businesses aren’t burdened with costly regulations and accounting rules.
Behind the scenes, whole and pieces of startup companies are bought an sold just like their larger counterparts on Wall Street. Two new exchanges bring together high net worth individuals and institutions alike to create a market small enough to evade the gloom on Wall Street and the regulations that send so many IPOs to bankruptcy.
Private Exchanges Are Nothing New
Private stock exchanges are a new thing. Typically, low wages at start-up businesses are offset with stock options, which may or may not pay off. Many times, employees have to wait it out for years, hoping that when the company IPOs they’ll be able to liquidate some, if not all, of their shares.
But private exchanges help bridge that gap. Two exchanges, SharesPost and SecondMarket, are leading the way in the private stock exchange boom. The companies help sell stock within private firms to investors who have the financial lee-way to wait out an IPO. Many startup employees and operators are finding the exchanges an excellent opportunity to raise cash without going through the procedures of listing on the big board. SecondMarket is emerging as the leader in start-up financing, with 40 deals and $150 million in transactions having taken place in the past year.
Staying Small is Crucial
Keeping the company, and the number of shareholders, in thin supply helps keep these companies under the radar. SEC rules require that firms worth more than $10 million must file annual reports if there are more than 500 shareholders. For many companies, this works out perfectly, as small companies can be easily financed by less than 500 shareholders. For many firms, the value of the company is far higher than $10 million but its financiers can be counted on one hand.
Got Cash?
Unfortunately most investors will never see the light of day with these private exchanges. Most deal with institutional investors which manage $100,000,000 or more, or individuals that have at least $1 million in assets or make over $200,000 per year. As each company can have a maximum of 500 shareholders, private exchanges can be selective in who gets to buy and sell on their exchanges.
