Today, Nasdaq and SharesPost jointly announced they are launching a new marketplace for trading shares in privately held companies.

At the outset, it sounds like an oxymoron: The whole idea of privately held companies implies that closed circle of founders, employees, and investors closely guards the equity.

But secondary markets like SharesPost and its nearest competitor, SecondMarket, have long been helping accredited investors and early-stage startup employees negotiate trades of cash for shares. Nasdaq’s putting its seal of approval on the practice (and rolling out its own brand of secondary market) shows a little bit of the exchange’s hand and illustrates its struggles to adapt to a tumultuous new world of corporate funding.

Recently, one famous flagship Internet IPO — Facebook’s — got the exchange into a huge public mess. Between technical glitches and communications issues, the brand-new shares’ price wobbled and crashed, leading Nasdaq to propose a $40 million refund for early investors. Those jitters only fueled the war between Nasdaq and the New York Stock Exchange, both hungry for the latest crop of technology IPOs.

“We’ve been saying for five years now that the public markets are broken and there’s a need for a new market structure,” said Barry Silbert, the founder and CEO at SecondMarket, a company that, like SharesPost, provides equity deals and liquidity for privately held companies.

Initial public offerings, he continued in a phone interview with VentureBeat today, take an incredible amount of time and effort to accomplish. And in the current economic and entrepreneurial climate, he (and Nasdaq) are less certain that the IPO is the best end-game for any company.

“If we could be successful doing this, it gives companies an alternative to going public or selling themselves, and it gives them total flexibility to how they raise money and who they raise it from,” he said.

Being successful at running a secondary market for private companies, however, is a gamble itself. Nasdaq has previously toyed with the idea, mostly unsuccessfully. Its BX Venture Market, launched in May 2011, was supposed to be a marketplace for early-stage companies and companies not listed on a national exchange. In 2007, Nasdaq also launched the PORTAL Market, a regulation-free marketplace for unregistered equity securities.

But this time, Nasdaq comes back to the idea with fresh blood: SharesPost’s technology and its relationships with the hottest startups Silicon Valley has to offer. Nasdaq thinks of itself as the brand that brings legitimacy and credibility to the investment table, but after last year’s Facebacebook incident, SharesPost and SecondMarket might hold more water with the tech community.

“The model they’re looking to build is the model we’ve created,” said Silbert. “It’s company-controlled, even down to when transactions happen. And they’re replicating that.”

A source close to the NPM venture told VentureBeat that companies will exercise vast amounts of control in Nasdaq’s version of the private, secondary market. At a minimum, companies decide whether they want to work with the NPM in the first place. Then they also get granular controls for each deal: who can buy and sell, how much equity and cash changes hands, and even the timing of trades — something Silbert recognized as a core tenet of SecondMarket’s own platform.

The NPM also provides protections for potential investors. A source close to the matter tells VentureBeat that the NPM will only list startups that have seen multiple rounds of funding and have some proof of revenue. That alone helps to mitigate a lot of risk and skim off a good deal of Silicon Valley froth from the deal pool.

“Somebody, whether it’s a bank or an adviser or an exchange, trying to assess whether a company is real is absolutely a mitigation of risk,” said Silbert, contrasting the private deals with public-market trading.

“It’s essentially creating listing standards. But in the private company world, it’s very difficult to put down on paper those kinds of standards. Some kinds of businesses are revenue-zero for a long period of time. Or you’ll have companies that are incredibly successful that have not taken institutional capital.”

And on the investors side, this isn’t a crowdfunding free-for-all where Grandma and Grandpa get to throw $50,000 at a Pinterest clone. Only qualified institutional buyers (aka VCs and other institutional investors) and accredited investors (aka angels) can buy shares in the privately held companies on the NPM — again, just like previously existing secondary markets.

And as Silbert pointed out, “The institutional investors are the ultimate judges.”

But as much as Nasdaq and its older, larger ilk may be struggling to keep up with the pace of entrepreneurship as we fully enter the era of apps as businesses, don’t expect public markets to tank and disappear any time soon.

“I have a lot of issues with the public markets, but they’re not going away,” said Silbert.

“The public markets, 60 percent to 70 percent of the volume is high-frequency trading done by computers that have no knowledge or care of the underlying businesses they’re buying and selling stock in. And the average investor holds on to that stock for less than three months. They’re essentially betting on whether or not a company is going to meet its earnings estimates.”

And for early-stage tech companies — as Facebook, Groupon, and Zynga can attest — that’s a crap way to do business. What secondary markets provide isn’t a substitute as much as an alternative.

“The blurring of the lines is the right way to look at it,” Silbert concluded.

“I think in the future, there’s not going to be this distinction between public and private. … We’re creating a new model where a company get the benefits of going public while maintaining the benefits of going private. … It has access to a deep pool of capital for primary transactions as well as liquidity. It has a deeper, closer relationship with its investors than a public company does.

“And when it comes to liquidity, it’s committed to providing liquidity, but it’s not doing to from 9:30 a.m. to 4 p.m. in a glorified casino run by robots and algorithms.”

Image credit: Nasdaq.

While we’ve been off tweeting out 140-character nonsense for the past seven years, Twitter has been building its company up to a valuation of over $11 billion, according to analyst firm Greencrest Capital. The company, founded in 2006, may now go public in 2014.

The social company has been growing and changing over 2012, giving hints that the initial public offering is on its executive’s minds, says Greencrest. As Forbes notes, these changes include shaking up the corporate level with a new chief financial officer, chief operating officer, and vice president of design.

Greencrest otherwise determined the new valuation of $11 billion by studying the secondary markets. Secondary markets are where outside investors can buy shares from existing private shareholders — for example founders, early employees — who are looking to unload their shares early. These markets are “a rumor rich and special share class soup,” said Max Wolff, an analyst at Greencrest, to Forbes. But with a little work, they otherwise can give a look into how much a company is worth. Most recently, Twitter had been valued at $9 billion, with this fluctuating after Facebook’s IPO.

It’s understandable, however, if Twitter wanted to hold off and see how the 2013 tech IPO market fares. In 2012, Facebook and Zynga both made it to Wall Street, but both floundered once there. Zynga dropped 5 percent on opening day due to concerns about the new market of “social gaming.” Facebook also declined in months following due to concerns about the way it handled its IPO.

Notetaking service Evernote’s chief executive Phil Libin is also holding back on an initial public offering. The company recently raised $85 million and plans to IPO, but “it’s not a pleasant experience right now to be a public company,” said Libin in an interview with VentureBeat at the time. He went on to say that there’s an “incompatibility between public markets now and tech.”

Twitter bird image via Shutterstock

In a conversation today at the TechCrunch Disrupt conference in New York City, Wilson, an early investor in Twitter, Foursquare and Zynga, said he’s still trying to figure out how exactly to invest in the Internet-driven cultural revolution.

While societal upheaval hasn’t made him any money yet, he says it can still benefit existing tools, like the way Twitter has been used in the recent and ongoing Middle Eastern revolutions, Wilson pointed out. He seems particularly interested in the anti-establishment potential of the Internet and future services.

Speaking more about the present, Wilson also vaguely hinted that Union Square Ventures has sold some of its Twitter stock via secondary markets. When asked by TechCrunch’s Erick Schonfeld, Wilson said he wouldn’t comment, but he also “wouldn’t argue” with news reports that USV and other investors have sold some of their Twitter stock.

In a statement released to the Wall Street Journal and other publications, Goldman (in what I believe is its first public comment on the deal) said it made the decision in response to “intense media attention”, leading the firm to decide that “the level of media attention might not be consistent with the proper completion of a U.S. private placement under U.S. law.”

It seems that the deal, where Goldman is offering its clients a chance to invest up to $1.5 billion total in the social networking company, was so widely publicized (because reporters got wind of the deal and covered it constantly) that it started to look less like a private investment and more like a public offering. The firm also told the Journal that the move wasn’t “required or requested” by the Securities and Exchange Commission or any other organization, but an SEC crackdown may have seemed likely since the agency is already looking into the sale of private company shares (including Facebook’s) on secondary markets. So rather than deal with US regulation, it’s keeping the deal overseas.

Goldman should still be able to raise the money, since interest in the deal was so great that the firm had to turn investors away. However, The New York Times notes that the majority of Goldman’s high-net-worth clients are based in the US, and it argues that the change could hurt the firm’s relationship with Facebook, which in turn might diminish the odds that Goldman would lead Facebook’s public offering, which is expected in 2012.

The firm also invested $450 million on its own into Facebook at a valuation of $50 billion.

Facebook plans to use some of the money to buy back its shares from employees, he says. Goldman wants to raise $1.5 billion from its clients (on top of the $450 million investment) to invest in Facebook, but the amount that Facebook accepts will be determined by employee interest in the buyback, Primack says. The idea is that as interest grows in purchasing shares through services like SecondMarket, Facebook wants to stay under the Securities and Exchange Commission’s 500-shareholder limit. If Facebook crosses that limit, it would have to disclose the same financial information as a publicly-traded company.

(The SEC is reportedly investigating those secondary markets, particularly the disclosure rules for the companies and investors. The Facebook-Goldman deal is reportedly increasing the SEC’s interest.)

Goldman clients definitely want to buy into Facebook, according to Primack and a report in the Wall Street Journal, who both say that Goldman has decided to stop accepting new investors on the deal tomorrow. Primack says the firm has already received $3 billion worth of investment requests.

The other details reported are more on the fun side. Goldman is telling its clients that Facebook has more than 600 million registered users, according to Business Insider. (The last publicly disclosed number was 500 million.) And if you want to see Goldman’s hush-hush note to investors about Facebook, you can read it here.

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]

The New York Times published a story last night stating that the Securities and Exchange Commission “has sent information requests to several participants in the buying and selling of stock” in Facebook, Twitter, LinkedIn, and Zynga. The story didn’t have many details about the investigation, and, oddly, SecondMarket, the leading marketplace for these types of shares, said today that it has not been contacted by the SEC.

A spokesperson from SharesPost, a similar marketplace, declined to comment on the Times story when I emailed them, except to say that “since its launch, SharesPost has made efforts to keep the SEC’s Staff apprised of the evolution of its marketplace and we have made every effort to structure our activities to be compliant with previous.”

Now the Wall Street Journal has more details about who’s being investigated and why. The SEC is “focusing partly” on the funds that pool investors together to buy these private company shares, allowing them to purchase shares of companies over the 500-shareholder threshold. If the threshold is crossed, private companies are required to disclose more information to the public. The SEC is also looking at whether the tech companies are meeting their financial reporting requirements and whether the people selling shares (who are often former employees) need to be registered broker-dealers, the Journal says.

To be clear, it sounds like this is all very preliminary. A spokesperson for one of the funds the Journal mentioned said it’s premature even to call this an “investigation”. But it’s certainly the case that as these markets grow, the government is taking notice.

[image via Flickr/Jacob Ehnmark]

As trading in private shares on the secondary market heats up, Silicon Valley’s hottest private companies are charging fees for the privilege. Bloomberg reports that Facebook is charging $2,500 per transaction. CNBC confirms that, and notes that Twitter is, too. Zynga recently raised its fee from $4,500 to $6,000, according to emails obtained by Bloomberg.

All this appears legal. Unlike the primary market, where companies issue new shares directly to investors, secondary markets involve the buying and selling of existing shares, much like the public stock markets. It’s long been possible, but it’s getting simpler, more open, and less controversial than it used to be.

In the secondary market, the companies are acting as their own transfer agents, the intermediary who handles record-keeping and information-distribution for buyers and sellers of shares. In the public markets, transfer agents charge small fees, and the price is driven down by competition: Publicly traded companies generally want to encourage trading in their shares.

And that’s the difference: By charging a high fee, Facebook, Zynga, and Twitter are trying to discourage trading.

Until they go public — an eventual outcome expected for all three companies by most observers — they need to keep the number of people who own their shares down. If they hit the limit — generally 500 shareholders, though some employee stock-owners don’t count — prematurely,  SEC regulations could require them to report financial statements like a publicly traded companies, at which point they’ll have most of the disadvantages of being a public company without the benefits. As it stands, these companies have an increasing administrative burden tracking their shares, which they’re trying to cover with the fee.

So far, so fair. No need to weep for the people who are currently trading in these shares. Regulations already require them to be accredited investors, with income of more than $200,000 or a net worth of more than $1 million. (As former VentureBeat contributor Paul Boutin recently noted in Wired, this means that the average Twitterhead has no chance of profiting from that company’s explosive growth.) The average transaction on SecondMarket, an exchange that facilitates private stock sales, is $2 million. SecondMarket and its primary competitor, SharesPost, cover the administrative fee.

Who loses? Midlevel employees at these companies, mostly. They’re left waiting for a liquidity event that may be years away. They may want to cash in some shares that they own free and clear, earned as part of their compensation and properly exercised, so they can buy a car or take a vacation. At that scale of transaction, $2,500 to $6,000 is a hefty chunk of the transaction. Imagine if your broker charged you that much to sell shares.

They’re stuck in sanctioned employee stock-sale programs, where the company generally doesn’t charge a fee but limits the number of shares that can be sold, sets the price, and dictates the buyer — generally a friendly investor like Mail.ru’s DST Global unit, which has bought shares on the secondary market from Facebook, Groupon, and Zynga employees and founders.

Secondary markets have brought a lot of benefits to tech companies faced with frozen IPO markets, offering at least partial exits to people whose wealth might only exist on paper. Mark Zuckerberg’s $100 million donation to the Newark school system, for example, was made possible because there’s secondary trading in Facebook shares.

Something feels wrong about these fees, though. They hardly discourage the wealthy from getting wealthier off private stock sales. But they do hit the tech sector’s middle class. In meritocratic Silicon Valley, should there really be two sets of rules — one for the wealthy and another for the rank and file?