(Bloomberg Opinion) -- It’s hard to close a SPAC deal right now, but former JPMorgan & Chase & Co. banker Blythe Masters pulled it off. Her Motive Capital Corp. completed a merger in March with Forge Global Holdings Inc., a marketplace that lets staff at startups sell shares before their employer has gone public. The upshot is there’s now a private securities market whose shares are traded on the New York Stock Exchange, providing more visibility into this opaque and less regulated world.
I’m sure the irony isn’t lost on Masters, who has championed blockchain since leaving the worlds of credit derivatives and commodities in 2014. While there’s plenty of competition, her bet that “private stock exchanges” will keep growing — despite deflating tech valuations — looks astute, as long as regulators don’t throw sand in the gears. With the IPO and SPAC markets moribund, these platforms may be able to help startup employees cash in some of their chips, provided they accept a big price cut.
Forge connects founders and tech workers holding otherwise hard-to-trade equity with investors such as hedge funds and family offices interested in buying their slice of the company. Only accredited investors (a posh way of saying wealthy or financially sophisticated buyers) can purchase private securities. Employees who sell stock through Forge often meet the requirements to buy shares in other startups available on the platform.
Secondary demand exploded last year as late-stage investors such as Tiger Global Management rushed to grab whatever pre-IPO equity was available, and early-stage investors were happy to take money off the table. Forge facilitated $3.2 billion of such deals in 2021, for which it collects chunky commissions. It reported $128 million of revenue that year and made an $18.5 million net loss.
Wall Street banks and brokers compete to facilitate secondary transactions. Rival digital platforms include Nasdaq Private Market, CartaX, EquityZen and Zanbato (the latter has received financial backing from Masters’ former employer, JPMorgan).
It’s telling that public-market champions are also leading the charge into private securities trading: Deutsche Boerse AG is a Forge investor; Nasdaq Inc. last year spun out its private-markets platform, and the London Stock Exchange Group Plc in March invested in UK private-markets fintech Floww. LSE says it wants to become the first global exchange that is “genuinely indifferent as to whether a company is public or private,” which is pretty radical stuff.
Once taboo, letting employees cash in some of their shares pre-IPO has become increasingly common as startups stay private for longer. It aids recruitment and retention, and ensures wage earners don’t have their entire net worth riding on a single illiquid asset. By restricting staff to selling only a small portion of their equity, startups can still ensure they remain motivated.
Of course, founders have been among the chief beneficiaries of the trend. For example, in 2020, serial entrepreneur Alex Chesterman sold £100 million ($120 million) of his holdings in Cazoo Group Ltd. less than a year after launching the online used car dealer but before its disastrous SPAC listing. There are other examples.
To be sure, secondary trading volumes have weakened in recent months, along with the slowdown in venture capital funding. Forge’s revenue declined 38% year-on-year in the first quarter, and it ditched full-year guidance in May just two months after the stock market listing. Forge’s shares have declined 28% this year, sending its value down to $1.2 billion.
Private startup employees know their employer probably won’t go public anytime soon and some are itching to sell. The supply of their shares has tended to outstrip demand because employee price expectations remain too high. It takes time “for someone to emotionally realize that their stock isn't worth what they thought it was worth last year,” Forge Chief Executive Officer Kelly Rodriques told an investor conference last month.
As reality sets in and sagging public-market valuations feed through to the startup world, the gap between bid-and-ask prices should converge, allowing trading to pick up again.
A liquid, low-cost and easily accessible private stock exchange is still far from reality. On average, Forge’s trades take 50 days to complete and it charges sellers a 5% commission. While Forge handles investments as small as $100,000, Zanbato’s average ticket is $15 million because it caters only to institutional buyers. Nasdaq Private Market’s average transaction size is $40 million.
What should regulators make of private-securities marketplaces? On the one hand, the platforms bring more liquidity to private markets, giving employees a better idea of what their equity is worth. To participate in CartaX auctions, companies have to provide a balance sheet and two years of profit and loss statements to potential investors, which is better than nothing.
But as these markets mature, it could mean a unicorn never has to go public and therefore isn’t subject to the Securities and Exchange Commission’s financial reporting requirements. And private-market participants will remain deprived of the protections that public markets offer, which rubs against some of these companies’ ambitions of broadening access to unicorn equity trading.
People touting SPACs emphasized how they were democratizing access to early-stage companies. I needn’t remind you how that worked out.
More From This Writer and Others at Bloomberg Opinion:
- Tech’s $1 Billion Unicorns Eclipsed by Centaurs: Lionel Laurent
- So Long Stock Bubble, and Thanks for All the Cash: Chris Bryant
- Private Markets Are The New Public Markets: Matt Levine
To contact the author of this story:
Chris Bryant at [email protected]