United States: Show Them The Money

One creative solution is a private secondary market for hard-to-trade assets, one bright example of which is the aptly named New York-based SecondMarket.

Barry Silbert, formerly an investment banker specializing in corporate restructuring and the sale of distressed, illiquid assets, founded the firm in 2004 initially as an online exchange for restricted stock in public companies. Registered with the SEC and also as a broker-dealer belonging to FINRA, MSRB, and SIPC, SecondMarket has since expanded into other asset classes including auction-rate securities, bankruptcy claims, fixed-income products, and its signature discipline, private company equity. In early 2010, the firm introduced capabilities on its platform that allow investors to "watch" thousands of private companies and receive publicly available information in the form of a newsfeed on their SecondMarket dashboard.

Based in the firm's San Francisco office, Senior Vice President Jeff Thomas (pictured above) leads business development for SecondMarket's Private Company Market division. As he explains, the firm remains focused on bringing structure and order to a prohibitively inefficient marketplace. "Historically, small growth companies have had unfettered access to the traditional capital markets," explains Thomas, who worked with private equity and venture capital firms on deal sourcing and structuring at global consultancy Gerson Lehrman Group before joining SecondMarket in 2010. "From the mid-'90s forward, however, structural changes, from SOX to high-frequency trading to the narrowing of spreads, have effectively closed the door to small- and micro-cap firms."

In fact, according to a 2010 report from Grant Thornton LLP, the U.S. IPO market is "closed to 80 percent of the companies that need it." Without research and brokerage coverage—the economics aren't there anymore, says Thomas—and with the market cap for admission to the public equity markets inhospitably set at $1 billion, venture-backed startups are stuck in an unnaturally protracted wait for the exit door. "Especially given the state of the economy, it's impractical to handicap growth by sticking investors and employees with shadowy liquidity prospects," he says. "Equity without liquidity is not an incentive."

Not all companies want their employees cashing out equity before an IPO, however. Some fear early cash-outs could threaten relationships with key employees or dilute their control over the company. "While private market trading can be a great vehicle for the orderly sale of securities by employees, some CEOs and boards view it as a negative," says Lion, who works closely with SecondMarket. "It's important to manage the process carefully." Forming close relationships with management teams and educating them on the benefits of the private market are integral to the game plan.

"Our approach is based on making the market work for the company, not the other way around," says Thomas. "When you go public, the market controls you, through daily stock churn, quarterly earnings pressure, and other factors. First, we learn the type of investors a company wants on its cap table. Then, by facilitating trading windows, which essentially set liquidity schedules for their stock, we help to control and optimize the buying and selling process."

Adhering to strict SEC rules, SecondMarket has created an automated system for pre-qualifying investors, who must meet the "accreditation" standard of possessing $200,000 or more in salary over the past three years, or a net worth of $1 million or more (excluding primary residence), and an assumed level of investment acumen and sophistication. Heavily concentrated on the institutional side, the firm's investor base can make informed investment decisions via the "watching" platform, where sellers can disclose select financial and other sensitive data in a controlled environment. With the SEC now closely "watching" the private secondary market, SecondMarket's diligence is paying dividends: two competitors were recently fined for allegedly misleading and overcharging investors.

Reporting over $1 billion in private company stock transactions since forming its private company division in 2008, SecondMarket is hitting milestones while also finding itself at an intriguing crossroads. In early February, Facebook, launched the same year as SecondMarket, had just announced its monster IPO. Transacting pre-public Facebook shares in 2007 propelled SecondMarket's private company business into life and has formed the bulk of its trading activity since—but with Facebook now following fellow social media giants Zynga, Groupon, and LinkedIn off the table, some have asked if the model can survive.

"We are maturing into a viable alternative for the many companies still unable to access the capital markets," says Thomas. "Even if the IPO market starts to turn around and more companies get funded earlier, this will let us work with an even broader range of companies, further enhancing our business."

Breathing Room For Young Companies

Over the past twelve months, a number of regulatory issues hindering startups and small businesses caught DC's attention. Several measures aimed to help small companies' ability to grow were introduced in Congress last year, including the Private Company Flexibility and Growth Act, which sought to update the antiquated "500 Shareholder Rule." In early March, the Private Company Flexibility and Growth Act, along with related pieces of job-creating legislation, were combined to create the Jumpstart Our Business Startups (JOBS) Act.

In addition to raising the 500 shareholder threshold to 2,000 and exempting current and former employees from the count, the JOBS Act's various components included lifting the ban on general solicitation, easing the path to the public markets and allowing companies to raise small amounts of capital through crowdfunding.

The new package of bills saw overwhelming bipartisan support and passed in the House in a matter of weeks. As the bill moved to the Senate, thousands of entrepreneurs, venture capitalists and members of the tech community championed for immediate passage, through robust social media campaigns and a successful online petition created by AngelList that gained over 5,000 signatures in just a few days. With the support from the tech community and the House's approval, the Senate passed the JOBS Act in mid-March, after including some additional investor protections.

"We were thrilled to see how quickly Congress took action on the JOBS Act," says Thomas. "These provisions will have an immense impact on how companies raise capital. Now startups can hire new employees and provide them with tangible stock options without the fear of being forced into the public markets before they're ready."

On April 5, 2012, President Barack Obama signed the JOBS Act into law, and noted that "these proposals will help entrepreneurs raise the capital they need to put Americans back to work and create an economy that's built to last."

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.