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.
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"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.