NASDAQ acquires Sharepost
On Wednesday March 6, 2013, NASDAQ surprised the small cap and investment community when it announced it is acquiring Sharepost’s private company market place (PCMP) exchange and rebranding it the Nasdaq Private Exchange.
In December, 2011, I wrote a few blogs on PCMPs. 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 pre-IPO Facebook, Groupon and LInkedin received their trading start. Following the IPO of these large entities, and in particular Facebook, traffic and use of PCMP sites declines, but NASDAQ clearly believes the decline is temporary, and I agree.
Private Company Market Places
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. The PCMP broker dealers are small firms (not Smith Barney) and the entire dynamic has the potential to bring back the small IPO and investment banking relationships that dominated the NASDAQ field twenty years ago. NASDAQ itself sees this potential and hopes to attract many broker dealers as participants in the new exchange.
A PCMP offers a true secondary and initial trading market for restricted and illiquid securities, where one did not exist previously. 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. 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. All required legal documents must trade hands whether created by the PCMP acting as escrow or 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. Both the SEC and congress are currently reviewing rules related to PCMPs 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.
There is no way to margin, short or create a derivative using a PCMP, thus greatly hindering, if not eliminating, market manipulation.
The JOBS Act Impact
PCMPs are venues ready to be utilized following the impending implementation of the Crowdfunding Act and removal of the restrictions on general solicitation and advertising for Regulation D rule 506(c) and Rule 144A offerings mandated by the JOBS Act of 2012.
Title II of the JOBS Act provides that the SEC will amend Section 4(2) of the Securities Act of 1933 and Regulation D promulgated there under, to eliminate the prohibition on general solicitation and general advertising in a Rule 506 offering, so long as all purchasers in such offering are accredited investors. Although on August 29, 2012 the SEC published proposed rules implementing Title II, those rules have been met with numerous comments and opposition and it is entirely unclear when a final rule will be enacted, but it will be.
Advertised offerings under Title II will be available to both private and public companies. Securities sold in these advertised offerings will be “restricted securities” as defined by Rule 144 promulgated under the Securities Act of 1933. Following a holding period, and in accordance with Rule 144, these securities will become eligible for resale. For a public company, the secondary market already exists, but for a private entity, a PCMP will now allow for a secondary market.
Likewise, the securities issued in a crowdfunding offering are restricted securities. The Crowdfunding Act states that the securities purchased in a crowdfunding offering may not be resold during a one year holding period, beginning on the date of purchase, unless such securities are transferred (A) to the issuer of the securities; (B) to an accredited investor; (C) as part of an offering registered with the SEC; or (D) to a member of the family of the purchaser or the equivalent, or in connection with the death or divorce of the purchaser or other similar circumstance, in the discretion of the SEC.
The SEC will need to draft new rules to cover these re-sale restrictions as they do not fit within the parameters of the current Rule 144. The easy provisions are Items (C) and (D). In (C), the company includes the securities in a registration statement filed with the SEC. Generally this would be part of a going public transaction and would result in the Company’s securities trading on either an exchange or the over the counter market. Item (A) raises a ton of questions, which I’ve discussed in detail in prior blogs.
The real meat is in (B). The first question raised is whether the transferee is subject to the same resale restrictions as the transferor. So if a crowdfunding investor immediately resells his or her securities to an accredited investor, is that accredited investor bound by the same resale restrictions? Does the one year holding period tack?
Although the details will need to be ferreted out, I can foresee an immediate trading aftermarket for crowdfunding securities, among accredited investors, through PCMPs.
The Author
Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com
Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
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