As everyone knows, the well-trodden path for technology startups starts in a garage, runs through angel rounds and seed rounds and other preciously named rounds of venture capital investments, and ends up with the glorious dream of listing on Nasdaq, yaaaaay. As everyone also knows, that last thing has recently become more of a boooo. The Nasdaq listing is less necessary, as modern startups tend to traffic in ethereal goods like Likes and so don’t really need to raise capital via IPOs, and it’s less pleasant, because you gotta file public documents, and your stock can go down, and something something something high-frequency robots, and David Einhorn can buy your stock and yell at you and stuff. Somehow being public has cost Facebook like forty billion dollars of market cap which is kind of amazing when you think about it.
Nasdaq is aware of this dimming of its value proposition and has come up with a new one. What if it told you you could be listed on Nasdaq but without the public documents and the David Einhorn? Would that be of interest to you?
The NASDAQ OMX Group, Inc. and SharesPost, Inc. announced today a joint venture that will establish the preeminent marketplace for private growth companies. … The NASDAQ Private Market (NPM) will provide improved access to liquidity for early investors, founders and employees while enabling the efficient buying and selling of private company shares. While NASDAQ will retain a majority stake in the venture, specific terms of the joint venture were not disclosed.
“The support of entrepreneurs is a fundamental element of our DNA at NASDAQ OMX,” said Bruce Aust, EVP of NASDAQ OMX. “The NASDAQ Private Market will provide private companies additional flexibility as they plan for their future and, at the same time, bring the investment community unique opportunities. By combining our resources, expertise and reach with SharesPost’s established technology, we will bring scale, efficiency and transparency to this marketplace.”
An increasing number of companies are choosing to remain private longer, which requires an efficient means to access liquidity for employees and investors. NPM will offer a complete, end-to-end solution that will enable a private company to control the marketplace for its shares. Transactions on NPM will meet NASDAQ OMX’s industry-leading standards for security, compliance and client support.
Details are sketchy but Nasdaq Private Market will be run by SharesPost’s founder, and one shorthand way to think about it is that “it’s SharesPost, only it’s called Nasdaq.” Right? Also more money and computers and stuff, but basically the point of this JV seems to be to capitalize on the fact that telling your crazed day-trader uncle “oh we trade on the Nasdaq [any sequence of words] Market1” is much more palatable than “we trade on SharesPost. No, with a capital P. I think.”
And what is SharesPost? Well it’s a private stock marketplace, plus various bells and whistles, though NPM will focus on the marketplace. Here are some of the advantages it advertises to issuers:
Set parameters and maintain control over who can buy, who can sell, how much, and when. SharesPost allows you to create a customized Private Investor Portal to manage your secondary transactions. … Manage shareholder transactions to minimize distraction to management.
Distractions like David Einhorn! A key advantage of trading on SharesPost instead of Nasdaq is you get to decide who can buy your stock, so you can keep out activists and raiders and HFT robots. (And, though they’re not quite in the “bad people who might buy your stock” category: you can keep out short sellers.) Another advantage has to do with public disclosure; you can’t literally get away with telling your investors nothing, but you can at least only tell it to your investors, with “permission-based access to information on prospective companies.”
So: I have no problem with this. People use phrases like “shareholder democracy” and “shareholder rights” in ways that imply that corporations are democracies or that shareholders have rights. Those are silly ideas! Shareholders have money and they give that money to companies in exchange for what they give the money to the companies in exchange for. If you gave your money to Dell, you had a set of expectations about how Dell would treat you – as a fiduciary and so forth – based on the securities laws, Delaware corporate law, Dell’s charter and bylaws, and market custom and precedent; maybe now you’re disappointed, I don’t know.
But those expectations are only binding if you actually expect them, and these days they’re loosening up. If you gave your money to Carlyle Group, you weren’t expecting fiduciary duties, because they told you not to. If you gave your money to Facebook, you weren’t expecting to have a meaningful vote on anything. If you gave your money to CommonWealth REIT, honestly, what were you thinking? There are some constants, or near-constants – you pretty much always expect to be able to sell your stock to any willing buyer – but even that isn’t in the Ten Commandments. REITS at least in theory restrict sales to foreign buyers.
The rules by which shareholders have certain rights come from mostly state corporate law – which is for the most part a flexible set of default rules that can be changed by corporate charter; from federal securities laws – which for the most part apply to public companies, not SharesPost-y companies; and from the rules of NYSE and Nasdaq. A lot of the more persnickety corporate governance rules – you need lots of independent directors, you need to let shareholders vote on whether to issue tons of stock, that sort of thing – are NYSE and Nasdaq rules, not actual laws. If you stay private, you have a ton of flexibility to structure around all of those expectations. It’s just hard to raise any money.
But Nasdaq Private Market should help with that: investors will be more likely to invest in private companies if there’s an established, Nasdaq-branded platform for them to get liquidity. And, y’know, if they’ll be allowed to sell. But that’s a matter of negotiation; you can imagine companies raising money with agreements that let the investors sell, but place limits on to whom and how much. That will presumably depress the price the company can get for its shares, versus a pure public capital raise, but maybe it’s worth it to avoid, um, management distraction. Also short-sellers.
There’s some reason to think that the set of liquidity, voting, fiduciary, etc. rights that public-company shareholders (usually) have is the “right” set, the set that maximizes the value of public companies. Remember, some of those rights come not from laws but from voluntary NYSE/Nasdaq listing rules: they’re rules that profit-seeking enterprises, somewhere in the hazy past, thought were necessary to attract capital to their marketplace. But that hypothesis isn’t tested a whole lot. It’s not easy for NYSE and Nasdaq to change their rules. When companies like Facebook come to market with horrible governance, their IPOs still do pretty well. (I mean, until they price, whatever.)
Who knows, maybe Nasdaq Private Market will end up with its own rigid set of listing rules, but my guess is not. My guess is that it will offer companies a lot of flexibility in striking their own balance between shareholder-friendly policies that attract investment2 and shareholder-restrictive policies that make management happy and undistracted. That’s good for managements, and not all bad for investors: instead of one-size-fits-all rights, they can in effect get paid to trade off liquidity and governance rights that they don’t care much about. Some investors may get value out of that. Probably not David Einhorn though.
1. Did you know that there are both a Nasdaq Global Market and a Nasdaq Global Select market and that they’re different things?
2. And employees. A main point for private-company marketplaces is to allow early employees to get liquidity in their equity compensation. You could imagine a theory in which those employees care a lot about the details of their liquidity opportunity, though that might be a stretch.