Posted on 04 January 2012.
The Wall Street investment community is abuzz about a securities trading platform called SecondMarket (secondmarket.com) that facilitates trading of illiquid securities, including pre-Initial Public Offering (IPO) shares of private companies. SecondMarket was founded in 2004, and started offering a United States Securities and Exchange Commission (SEC)-registered alternative trading platform in 2009 for facilitating trading in private company stocks.
SecondMarket provides an avenue for accredited investors to invest in private company stocks before they become publicly traded stocks via an IPO, including shares of privately held Facebook, which is expected to be one of the biggest IPOs ever when it occurs in 2012. Having the ability to buy private company stocks via SecondMarket, before the stocks become publicly trading securities, can offer huge profit potential for investors willing to buy pre-IPO private stocks in hopes that they will become much more valuable publicly traded stocks after an IPO. It is not unusual for stocks that undergo IPOs to trade for 50% to 100% above their IPO price (the price that shares are sold to buyers of the IPO that are allocated shares) once the shares are trading on a public stock exchange and the broader investment community has an opportunity to buy the post-IPO shares. While a hefty profit can be made by investors who are allotted shares in an IPO and are able to buy them at the IPO price, investors who buy pre-IPO shares on SecondMarket often have an even greater profit potential since pre-IPO shares are usually can be purchased considerably cheaper than the price that IPO shares are sold to the investment community.
For example, SecondMarket has facilitated the trading of millions of shares of privately held Facebook stock. Investors who buy private Facebook shares via SecondMarket, before the Facebook IPO in 2012, may be able to pay significantly less than the IPO price for their Facebook shares purchased through SecondMarket, which increases their profit potential once Facebook is a publicly traded post-IPO stock and likely trading well above its IPO price.
Buying pre-IPO shares in private stocks via SecondMarket may sound too good to be true to the average investor, and unfortunately, there is a catch. Individual investors are not able to buy private company shares via SecondMarket. Only accredited investors can purchase shares of private stocks using SecondMarket. An accredited investor is a person with a net worth of One Million United States Dollars or greater (excluding their personal residence) or has had an income of greater than $200,000 per year ($300,000 for married couples) for two or more years, and an expectation that they will continue to meet these earning thresholds for the foreseeable future.
The accredited investor limitation obviously means many individual investors are not qualified to buy pre-IPO shares in private stocks on the SecondMarket trading platform. However, a recent development in the mutual fund realm of the investment world means that individual investors are not entirely shut out of the lucrative private stocks pre-IPO market, such as SecondMarket. In December 2011, Keating Capital Inc. listed its closed end pre-IPO fund on the NASDAQ stock exchange under ticker symbol KIPO. Keating Capital Inc.’s pre-IPO fund invests exclusively in pre-IPO shares of private companies to provide growing private companies with needed capital and to take advantage of the great profit opportunity that buying private company shares prior to their IPO offers. This means that despite the SecondMarket investment limitations, individual investors can invest in the pre-IPO private stocks by buying KIPO.
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