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The easy availability of investor cash has allowed many technology companies to delay listing on public markets but caused a surge in trading of a different kind: in the private shares of unlisted companies.
For U.S. venture-backed tech companies, the private market has outstripped the public market when it comes to raising capital this year. So far they have raised just $600m through initial public offerings, and 35 times as much — or $20 billion — through private offerings, also known as "private IPOs", according to CB Insights.
This boom in private primary offerings has translated into demand for secondary trading platforms from companies, their employees and investors.
Companies such as Airbnb and Pinterest are arranging formal programs that allow employees to sell shares — an important tool for retaining talent in a hyper competitive market. Companies also want to retain control of their shares (and by extension, the composition of their ownership).
Meanwhile, investors such as mutual funds and family offices are clamouring to tap into the growing numbers of private tech companies that are waiting longer than ever to go public.
New York-based SecondMarket, one of the largest platforms for private tech tender offers, saw transactions quadruple in value last year, reaching $1.4 billion.
The huge growth in investor interest has also fuelled more exotic structures for secondary and tertiary trading, including derivatives contracts. For the most sought-after private companies, like Uber or GoPro, these help circumvent the tight restrictions that govern the shares.
Much of the increase is due to the fact that more tech companies today have crossed the $1 billion threshold, a status that used to be so rare that the companies are known as "unicorns".
"In 2012 there used to be a dozen private companies worth over $1 billion, and now there are nearly 100," says Bill Siegel, SecondMarket's chief executive.
The key catalyst was the 2012 Jumpstart Our Business Startups (aka JOBS) Act that raised the maximum number of shareholders in a private company to 2,000, excluding employees, from 500. "The difference between public and private is just an arbitrary line and it happens to be farther along compared to where it used to be," he said.
Public exchanges, perhaps sensing the threat, are getting involved. Nasdaq established Nasdaq Private Market two years ago, which facilitates secondary offerings through company-approved tender programs, as a joint venture with SharesPost.
"The trend was clearly that companies were staying private longer," says Jeff Thomas, president of liquidity solutions at Nasdaq Private Markets. "So it just made all the sense in the world to have Nasdaq start helping these companies earlier, in the hopes that they will eventually become publicly listed on Nasdaq."
Greg Brogger, founder and chief executive of SharesPost, which provides services to private companies including SoundCloud and Shazam, says the rise in secondary market activity helps create more access and transparency into privately held tech companies.
The biggest part of the private secondary market today is company-sponsored tender offers, in which the company allows employees or early investors to sell shares to selected buyers.
The company controls the process completely, setting the price and choosing buyers. Typical buyers include mutual funds, private equity funds, family offices or investors who were not able to get a slice in primary investment rounds.
For employees, tender offers allow them to sell the shares they receive as incentive pay.
"It makes paper stock options into something of real value," explains Kent Wakeford, chief operating officer for Kabam, a gaming company that has twice used SecondMarket to conduct a tender offer. "Three people bought homes after our most recent secondary offering."
"Larger institutions are now looking for more deal flow in the Valley," Mr Brogger points out. "They don't have networks out here because historically Silicon Valley has been an old boys' club of . . . venture capitalists who control all of the information and all of the deal flow."
The last time there was a similar surge in activity, it led some private companies to tighten share transfer rules.
Between 2010 and 2012 — before the IPOs of Facebook, LinkedIn and Twitter — there was a surge in trading of private shares, with some negative side effects. Trading was thin, so share prices were highly volatile. Moreover some companies ended up having to pay costly legal bills to figure out who owned their shares when they eventually prepared for their IPOs.
Many private tech companies placed tighter restrictions on their shares as a result.
"Most of the unicorns have very strict no-transfer clauses to avoid the wild-west transactions that Facebook had to live through," says Jamie Hutchinson, a lawyer at Goodwin Procter. "Since the 2012 window when Facebook went public, there has been a systemic shift to a much more traditional, routine system."
As the private market changed, the brokerages that had been most active in trading the company's shares had to change their business models.
SecondMarket shut down direct share trading to focus on tender offers, while SharesPost reoriented around a fund of shares in diverse venture-backed companies, although it still conducts direct share sales.
Yet even as business is booming, concerns are mounting about the lack of clear guidelines about transparency in private market transactions. The U.S. Securities and Exchange Commission prohibits trading based on inside information, but apply the rules to private company transactions can be difficult. Employees are governed by non-disclosure agreements and investors outside a private company may have little information.
"It is not a very well defined set of rules, because all the case law and guidance has been on the public side, so this is an emerging issue," says Mr Brogger.
When a company approves a tender offer, it often provides audited corporate performance statistics to both buyers and sellers — SecondMarket, for example, requires two years of audited financials. In other types of transactions, information disclosure can vary widely.