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As interest in secondary markets for shares in hot private companies like Facebook and Twitter grows (among both investors and regulators), a new startup called Xpert Financial is about to launch its own trading platform.
Secondary markets allow startup shareholders (often former employees) to sell their stock in a company to outside investors. Xpert Financial says it wants to work more closely with the companies whose shares are being sold. Companies will be able to approve all of the investors who buy their shares — which, among other things, allows them to distribute company information to investors in a controlled way and ensures that they keep the number of shareholders under 500 (companies that cross that threshold are required to disclose more information publicly).
Beyond selling already-distributed shares, Xpert says companies can use its service to sell primary shares — in other words, they could use the site to raise funding.
Xpert says it has received approval from the Securities and Exchange Commission (SEC) to become what it calls “the first alternative trading system for private company securities”. And it’s a registered broker dealer with the Financial Industry Regulatory Authority.
The SEC is reportedly starting an inquiry into secondary markets, although it seems more interested in the pooled funds that invest in the companies than in the marketplaces where they buy shares. In other words, it’s not clear that the SEC will be directing greater scrutiny at Xpert’s competitors.
The company has raised $3 million in funding from angel investors, including venture capitalist Tim Draper.
Update: I’ve been trying to wrap my mind around how, specifically, Xpert’s relationship with the SEC is different from its competitors — in part, because I got it wrong in the first version of this post. So I asked Xpert CEO Thomas Foley for more details, and then ran his comments by SecondMarket’s spokesperson to see if it seemed accurate. Here’s Foley first:
From our knowledge, Second Market is a Broker Dealer with FINRA and conducts phone based transactions of securities – ranging from CDOs, ARSs, Bankruptcy Claims, and some private securities. Sharespost is a website that acts as a passive bulletin board to allow members to connect offline to negotiate transactions. Both of these companies have come a long way to prove the demand out in the market for private company securities, even without information.
Xpert Financial is a registered Broker Dealer with FINRA and Alternative Trading System with the SEC – this allows us to run our electronic, alternative trading system build for creating efficiency and liquidity for private companies and their shareholders in a company controlled system. Private companies have access to capital, investors have access to great private companies, and shareholders have access to liquidity.
And here’s Mark Murphy from SecondMarket:
Not surprisingly, these guys have completely misconstrued our model. SecondMarket utlizes a hybrid model – an electronic platform that provides centralization and efficiency, coupled with our team of market specialists who help to faciliate transactions. This combination of a robust platform and an experienced team of professionals (rather than an all-electronic approach) is essential to conducting transactions of alternative investments given the complexity if these trades. In fact, our platform was recently recognized by the World Economic Forum as we were named a 2011 Technology Pioneer. We are receiving our award in Davos next month.
We have approximately 135 employees in New York, Palo Alto and abroad. We have conducted several billion dollars of transactions across all of our asset classes – including a half billion dollars in nearly 40 private companies alone – since we launched in 2005 (although our private company stock market launched in April 2009). We are subject to both announced and unannounced reviews by our regulators, FINRA and the SEC (contrary to Xpert’s inference, broker-dealers must file with and are regulated by the SEC).
Also, Xpert’s designation as an ATS simply means they will conduct business differently than us (all electronic vs. hybrid) and have a different regulatory designation. In fact, being a broker-dealer or an ATS does NOT mean that the SEC endorses you. It simply means that you have qualified for those designations based on the way you operate (or state you will operate) your company.
[photo via Flickr/emdot]