Private Capital Marketplace – A First Look

As I discussed in a recent blog, the attraction of the small cap and reverse merger market has diminished greatly in the past two years.  The Over the Counter market has become an expensive place to conduct business; the antithesis of the very reason small companies sought to list there to begin with. Accessing capital markets for microcap companies is not as simple as it once was.

In addition to the added expensive of complying with the Securities Exchange Act of 1934 disclosure requirements, the marketplace invites speculators who short sell (bet that the price of a stock will go down) and hedge with derivatives, often creating unpredictable volatility and share prices not indicative of the underlying value of the actual business.

No Automatic Liquidity for Issuers

Being public is no guarantee of liquidity either. It’s fantastic for an issuer to state that their stock is being quoted at $5.00 per share, but if there is no volume (the shares are not actually being bought and sold at or near that price) this claim is meaningless. It takes two to tango; a buyer and a seller.

In my recent blog outlining the current problems with the Over the Counter marketplace and shell transactions, I suggested that Rule 419 may be a viable answer to many of the current issues facing this beleaguered sector.

Private Company Marketplace (PCMP)

There is also another opportunity in town that is at least worthy of consideration by small companies seeking capital; the Private Company Market Place (PCMP).

A PCMP is a trading platform, such as SharePost or SecondMarket that provides a marketplace for private shareholders to buy and sell shares of private companies from other private shareholders.  It is on a PCMP that Facebook’s shares currently trade and where pre-IPO Groupon and LInkedin traded.

The NASDAQ of the 1980’s

Recent industry articles have likened these PCMP’s to the NASDAQ marketplace of 30 years ago.  That is, NASDAQ once catered to small emerging companies, providing a place for capital formation and share valuation before they became “big boys” and moved onto a larger exchange such as the NYSE or AMEX.

Now NASDAQ is a “big” exchange, small-cap companies are left with the OTCBB, OTCQB or Pink Sheets.  The problem with this dynamic is that companies trading on the Over the Counter markets still face big public company expense in an economy generating small company revenues.

Staying Private Longer

PCMP’s allow a company to attract capital and establish a market presence and valuation, while staying private longer.  Moreover, since there is no way of shorting or margining private company shares, a PCMP will not attract short term volatile speculators and market manipulators.  Most importantly, PCMP’s provide liquidity and an exit strategy for investors in private companies, something that did not previously exist.

PCMP’s are currently unregulated, other than being subject to the same broker dealer registration requirements for their operators and registration exemption and anti-fraud requirements of all securities transactions.

Let’s see where this goes.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (“Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (“Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.


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