NASDAQ Private Marketplace: Why now?

nasdaq logoAccording to WSJ, NASDAQ with the recently launched private marketplace aims at developing relationship with companies before they decide to go public. Also, this would help the exchange to boost its revenue stream as well as to have an advantage over its rival exchanges such as NYSE.

However, the joint venture between NASDAQ and Sharespost was already formed a year back. Then, why it took so long to launch the platform officially? What were the reasons that drove this launch now?

First thing first.

As noted by NowStreetJournal, the major reason for emergence of the private marketplace or secondary private markets was the unavailability of attractive growth capital raising options for small cap companies. Also, the investors lacked access to quality growth companies due to the market dominance by handful of players.

In early 2010, this led to the growth of private platforms which allows buying and selling of equity and debt of the non-public companies. The first movers in this space were platforms such as SecondMarket, a US based online marketplace for buying and selling illiquid assets, including auction‐rate securities, bankruptcy claims,  etc.

Technical glitches

There has been a history wherein US stock exchanges were found struggling to maintain their technical errors, specifically during or post IPO launch. For instance, The New York Stock Exchange in November 2013, briefly mislabeled all trades on its data feed.

Facebook IPO, launched in 2012, was considered among the biggest internet IPO’s in the public security market. However, on the day of listing, due to the technical glitches with the NASDAQ exchange, the stock faced a high amount of struggle to stay even above the IPO price of USD 38, for most of the day.

This caused NASDAQ to pay USD 41.6 million to firms with submitted claims. Also, it paid USD10 million in penalties to the U.S. government. Not only this, the mishap also made it lost Twitter IPO which chose to get listed on NYSE rather than NASDAQ.

On the other hand, Class B shares of Facebook traded as high as $44.50/share ($46.30/share after commissions) on SharesPost prior to the IPO.

NASDAQ previous initiatives to enter pre-IPO market

NASDAQ, thus, entered into the pre-IPO market in year 2013, initially, focused upon providing private companies with integrated solutions for equity management. This includes providing information such as company pages, research and on other marketplaces.

However, as quoted by Venturebeat, this is not its first attempt in entering into the pre-IPO market. Previously, in 2007 it launched “Portal Market” for unregistered equity securities and in 2011, “BX Venture Market” as a marketplace for early-stage companies.

It makes sense now!

Neither of the earlier efforts of NASDAQ went too far. However, the chances of getting success seems quite high now. First, the  partnership with the SharesPost would allow NASDAQ to leverage the company’s existing technology and relationships.

Second, the amendments in JOBS Act in 2012, reduced a few roadblocks Jumpstart Our Business Startups (JOBS) Act, is a law intended to encourage funding of United States small businesses by easing various securities regulations. Initially the member companies in the private marketplace need to disclose their financials once they reach a shareholders limit of 500. In 2012, the limit was increased to 2000.

As reported by various publications, NASDAQ Private Marketplace have about 15 to 20 companies signed so far and have identified about 500 more that could be a good fit.

Other players in this space include AngelList and Crowdfunder that provides entrepreneurs and small businesses, a platform to connect with investors. And allow even individuals to contribute in the fund raising with as little as USD 1, 000 amount.

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