by Hannah White

Created on: July 18, 2011   Last Updated: July 19, 2011

eBay of Illiquid Securities

SecondMarket is an SEC-registered alternative trading platform, an online broker-dealer whose primary business is to create and maintain a marketplace for illiquid – hard to sell or buy – securities. They focus on a number of hard-to-trade asset classes, including private company stocks. By the end of 2010, they facilitated over 500 private company stock transactions in a total value of over $700 million dollars and are becoming the ‘hotspot’ or the eBay for trading the most sought-after shares of private businesses.

Private companies

Privately held companies, also called unquoted or unlisted companies, are businesses owned by a relatively small number of shareholders, many typically employees or company members. The private shares are not listed or traded publicly on stock exchanges, but may be offered and traded privately, typically in arms-length or expensive transactions.

Many private companies are smaller businesses, but the largest ones, such as Bechtel, Publix, S.C. Johnson are well-known businesses with hundreds of billions of dollars of annual revenue. A third category of private companies includes start-up or early-stage businesses that have not wanted or been able to ‘go public’ yet and have not listed their securities on the stock exchanges yet.

Hot private stocks

It is the third group of private companies whose shares beg for a more efficient and structured market. Pre-IPO companies like Facebook, Twitter, Groupon are of special interests to investors who hope to buy into them as early as possible to participate in the big gains that high-growth, new businesses’ values experience between their establishment as viable businesses and the period during which their shares are first offered publicly.

Investors are especially hungry for pre-IPO private shares due to the anemic IPO activity of recent years compared to the feverish initial public offering market of the late 1990s, when an average company went public after four years of existence while in 2010 the average time before the IPO was almost 10 years. On the other side of the hypothetical transactions are employee and venture capitalist owners of private company stocks who may also look for a faster exit for at least a portion of their positions.

Difficult and costly private stock transactions

In the absence of structured markets for private stocks, the meeting of potential buyers and sellers is extremely

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