Private Capital Market Places – A Second Look

by Laura Anthony, Esq. on December 16, 2011 in Broker-Dealer, OTC Market, OTCBB, OTCQB and OTCQX

Last week I wrote a blog introducing, at least to me, Private Company Market Places (PCMP).  A PCMP is a trading platform, such as SharePost or SecondMarket that provides a market place for illiquid restricted securities, such as private company securities, 144 stock, debt instruments, warrants, and the like or alternative assets.  It is on a PCMP that Facebook’s shares currently trade and where pre-IPO Groupon and LInkedin received their trading start.

This week I reviewed some of the top PCMP players, including Gate Technologies, SecondMarket, Sharespost and Xpert Financial.  I have no affiliation, have never worked with and maintain no accounts with any of these PCMPs.

PCMP’s are Broker Dealers or Affiliated

Each PCMP is a licensed broker dealer or affiliated with a licensed broker dealer, that has either created or licensed an electronic trading board, available at their respective websites, which allows investors to view, buy, and sell otherwise illiquid, restricted or alternative assets.  These securities are not available for trading on standard platforms.  The underlying Issuer may be private or public.  The securities are not standardized (i.e. they are not all stocks, have different holding periods, come in different denominations, etc.).

However, despite this, each PCMP looks, acts and feels, like a standard trading platform such as the OTCBB or OTCQB.

Extensive Research Materials are Available

To take it one step further, a PCMP offers third party analyst coverage of the securities offered, something that is rare on the over the counter market.  Moreover, Issuers who have allowed their shareholders to trade on a PCMP, or who are engaging in a private offering themselves, can post offering documents, press releases, and other disclosure information on themselves, providing transparency and pre-public exposure.  The more advanced PCMPs, such as SharesPost, allows Issuers to post large files such as full video’s, PowerPoint presentations, and just about any other electronic format information they want.

Identical Broker Dealer Services Provided

Each PCMP offers a fully-automated back office, documentation, escrow, transfer and settlement support. Users open trading accounts, like they would with any other broker dealer.  The PCMP provider collects a commission or fee for these services, all bolstering the requirement that they be registered as a broker dealer, or affiliated with a broker dealer.  Interestingly, the PCMP broker dealers are small firms and the new platform has the potential to bring back the small IPO and investment banking relationships that dominated the NASDAQ twenty years ago.

A PCMP offers a true secondary and initial trading market for illiquid and restricted securities, where one did not previously exist.  Even the screens on the PCMP trading sites look substantially similar to a Bloomberg or NASDAQ trading screen, showing high and low prices, current bid and offers, charts, last bid information and the like.

In order to use a PCMP, a buyer or seller must be qualified; individuals must be accredited investors.  All participants are subject to the anti-fraud, registration and exemption provisions of the federal, and if applicable, state securities laws.  Everything must be password protected and electronically secure.

Issuer Information

All required legal documents must trade hands whether created by the PCMP acting as escrow, by the back office, or by the buyer and seller consummating the transaction. The downside of a PCMP is a lack of unified or sometimes any disclosure on the Issuer’s whose securities are being traded. If a large volume of information exists for an issuer, it can be difficult or impossible to verify.

The upside to the PCMP concept is that it avoids many of the costs of complying with the Securities Exchange Act of 1934 disclosure requirements. Both the SEC and congress are currently reviewing rules related to PCMP’s and hopefully will find an affordable middle ground.  PCMPs are directed at sophisticated, accredited investors, and as such, will hopefully, avoid the over-regulation of standard public company trading platforms.

As noted in my previous blog, there is no way to margin, short or create a derivative using a PCMP, thus greatly hindering, if not eliminating, market manipulation and attacks by short sellers.

So far, PCMP’s appear to be a practical alternative to the increasingly expensive and difficult small public company market place.

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.

© Legal & Compliance, LLC 2011


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