Growth5 Blog

Thursday, July 30, 2009

Still Private, Facebook and Twitter Stock For Sale

SharesPost, SecondMarket and XChange are private stock exchanges that have launched with the intent of solving the VC liquidity crisis. The exchanges provide an alternative way to trade private shares in startups like Facebook, Twitter or LinkedIN for cash — without having to wait years for the eventual IPO.

These exchanges can be a great place for private investors or employees of popular startups to trade their shares. Many of these employees get paid a portion of their salary in stock options that wouldn't otherwise be marketable until the company went public.

It will probably take awhile for these exchanges to see heavy trading as only Institutional Investors and Accredited Investor individuals can purchase these shares. You are an accredited investor if you are worth more than $1 million dollars, or have made over $200,000/yr each of the last two years.

If these exchanges can garner support from the Institutional Investor community, it could help the economy by unlocking capital that private investors have in these startups to be invested elsewhere and by Institutional Investors being able to fund younger startups that aren't yet public in a more liquid investment than the current "locked up" private-only alternative.

IPOs in the US have dwindled, exacerbating the liquidity issue in the VC space. "More than a dozen companies have priced IPOs in the U.S. this year, down from 35 in the first half of 2008, according to research firm Renaissance Capital. In the same period of dot-com-crazy 2000, there were 219 IPOs in the U.S."

These exchanges sound like a great idea, however, they are not without significant challenges. Some private companies have a "right of first refusal" on their stock to avoid stock being sold to competitors or to prevent the number of shareholders from growing over 500. "Private companies with more than $10 million in assets are required to file annual reports with the SEC if they have more than 500 shareholders of record. This rule prodded Google Inc. into filing for its IPO in 2004, and it could happen to others as these exchanges distribute shares among more shareholders."

The larger issue for buyers is verifying the value of the sale price being asked by the selling shareholders without being able to see the private company's financials or other important disclosures that private companies are not required to provide.

I would guess that a lot of the initial transactions will be based on what private investors feel are "no-brainer" investments in Facebook or Twitter at whatever price shareholders are offering. Caveat emptor.

Source: Associated Press

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