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    Pre-IPO or Bust

    A growing secondary market for shares trading has accelerated in the past year, with online private shares exchanges such as SharesPost Inc., SecondMarket Inc., and Xpert Financial Inc. emerging from the tumultuous wake of the financial crisis. While the advent of private trading has enabled companies, including the hottest tech companies such as Facebook Inc., LinkedIn and Zynga Game Network Inc., to raise funds without filing for an early initial public offering, the majority of investors, those with less than $1 million in net worth, are prohibited from trading on these exchanges. This has not dissuaded investor firms from cashing in on what some observers believe is an inflating bubble.  Nor has the prospect of fresh regulatory scrutiny deterred companies from circumventing the public markets.

    Investors are looking for multiple higher returns on their investment after a dry recessionary period where initial public offerings were sluggish at best and the Dow Jones Industrial Average and Standard & Poor’s 500 Index witnessed tepid growth.  In the U.S. IPO market, 2010 saw over 100 deals priced, compared with 64 for 2009 and only 48 in 2008.  The venture capital market has shrunk, with 400 VC firms in Silicon Valley compared to over 1000 only several years ago. 

    The private investor market may be a prelude to a more robust IPO phase next year.  In 2010, 48 technology companies went public, compared to 17 in 2009 and 3 in 2008.  This year alone, two technology companies had successful IPOs, currently trading above their initial prices.  Web-based content developer Demand Media Inc. and research firm Nielsen Holdings Inc. went public in January 2011, with Demand trading at $22 over its $17 initial offering and Nielsen at $27 over $23.

    The significance of this emerging industry, while notable, remains mired in debate. Emerging companies have discovered a lucrative way to raise funds for their expansion without having to go the IPO-route, or at least delay an inevitable IPO.  Early investors are benefiting by purchasing shares that will exponentially multiply upon exit or an IPO, leading to returns exceeding those earned by ordinary investors post-IPO or even late private investors pre-IPO. The Securities & Exchange Commission (SEC) is already investigating this parallel investor market; New York-based SecondMarket stated that the SEC has requested information on investment funds that are pooling together shares of companies.

    The SEC may be evaluating the need to regulate such pooled funds that circumvent the 500 shareholder rule and thereby avoiding financial disclosure as markedly different from a select few venture capitalists investing in fully researched companies. Securitization of such investment vehicles may lead to additional regulatory issues, particularly in the derivatives market.

    How far pre-IPO shares trading goes remains to be seen. As a uniquely alternative capital raising model, the secondary market is providing company owners, employees and investors an opportunity to generate wealth while increasing company valuation.  While risks of a bubble will always exist in this sphere, the secondary market is proving that an IPO, the ultimate hallmark of corporate achievement, may be finally witnessing some competition.

    • 26 February 2011
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  • Shezi Sardar's Space

    Shezi is a media and technology lawyer in New York City, with a penchant for entrepreneurship in emerging industries. He is a co-founder of Global Executive Board, a social media advisory services company.

    An avid blogger and industry journalist, Shezi also blogs at The Laughing Owl. He is also a member of the International Trade Committee of the NYC Bar Association, a nominated position, and is admitted to practice law in NY.

    Sardar Law Firm LLC
    www.sardarlawfirm.com

    Profiles
    http://about.me/shezisardar
    http://flavors.me/shezisardar

    Blogs:
    The Laughing Owl http://thelaughingowl.tumblr.com
    Shezi & S. http://shezisardar.posterous.com

    Twitter:
    @shezisardar
    @socialmedia_law
    @sardarlawfirm

    Email: sardar [at] sardarlawfirm.com

    Contributed by Shezi Sardar

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  • About Shezi Sardar

    Shezi is a media and technology lawyer in New York City, with a penchant for entrepreneurship in emerging industries. He is a co-founder of Global Executive Board, a social media advisory services company.

    An avid blogger and industry journalist, Shezi also blogs at The Laughing Owl. He is also a member of the International Trade Committee of the NYC Bar Association, a nominated position, and is admitted to practice law in NY.

    Sardar Law Firm LLC
    www.sardarlawfirm.com

    Profiles
    http://about.me/shezisardar
    http://flavors.me/shezisardar

    Blogs:
    The Laughing Owl http://thelaughingowl.tumblr.com
    Shezi & S. http://shezisardar.posterous.com

    Twitter:
    @shezisardar
    @socialmedia_law
    @sardarlawfirm

    Email: sardar [at] sardarlawfirm.com

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