Nasdaq has targeted the lucrative pre-IPO trading game, aiming to give investors access to companies before they go public, and build a relationship with tech firms before they choose an exchange to list on.
Nasdaq OMX Group announced the launch of Nasdaq Private Market, a joint project with SharesPost, which offers a similar type of platform but on a smaller scale. Greg Brogger, who founded SharesPost back in 2009, has been made president of the newly-formed company.
Nasdaq Private Market will give the exchange entry into the increasingly valuable secondary market utilized by existing investors or employees who decide to sell. Transactions involving sale of stock by employees or shareholders jumped 51 percent last year to $12.4 billion, from $8.2 billion in 2012, according to data from research firm Nyppex. The same data suggests that number will increase by 55 percent this year to $19.3 billion.
Between 15 and 20 companies have signed up to the platform so far, all meeting the requirements laid down by Nasdaq. Any company that wants to use the service to attract investment must have an enterprise value of $50 million or more and annual net income of $750,000 or higher. Nasdaq Private Market has identified more than 500 companies that fit its guidelines, according to Brogger.
“We listened to the needs of private growth companies and developed Nasdaq Private Market to serve as a fully integrated end-to-end solution for managing their equity functions,” said Brogger in a statement.
For Nasdaq the rewards stretch beyond traction in a blossoming area of trading. The exchange can build lasting bonds with any up-and-coming companies on the Private Market platform, and will offer them services such as public relations. Nasdaq is banking on companies remembering that relationship when the time comes for them to go public, and choose an exchange to list on. It is keen to bring tech companies back onside after losing listings such as Twitter and LinkedIn to the New York Stock Exchange. Their decisions were attributed in part to the mishandling of the Facebook IPO, and Nasdaq now seeks to regain the tech community’s trust. In 2013, the New York Stock Exchange handled 25 tech deals, compared to Nasdaq’s 23, according to research from Dealogic.
This type of trading is possible because of the Jumpstart Our Business Startups (JOBS) Act signed into law by President Barack Obama in April 2012. The law eased regulatory mandates and allowed private companies to have up to 2,000 shareholders. This caused an explosion in pre-IPO transactions, which was popularized by trading in social media sites such as Twitter and Facebook. Now, the majority of these social giants have gone public themselves, but investors still want to get in early on tech companies on the up. Nasdaq will face competition in this space from SecondMarket, which has raised over $34 million since it was founded in 2004.
The pre-IPO trading market shows no signs of slowing down, and Nasdaq has made a shrewd decision in making a play in this area. Critics may say that promoting investment prior to going public goes against the best interests of a stock exchange, as it increased funding may delay an eventual IPO. But in this respect Nasdaq plays a long game. In time, the listing choices of the top tech players will reveal if it’s a game they’ve won.