SecondMarket Enhances Liquidity, But With Caution

The current volatile market has delayed IPO plans for many companies. But it has not stopped their shares from trading on alternative exchanges like SecondMarket. During the first three quarters of the previous year, SecondMarket recorded 75% growth in private company stock transactions to book transactions worth $435 million during the period.

SecondMarket’s Financials
Driven by such positive trends, SecondMarket is seeing growth in their own valuation and has managed to raise additional funding. Recently Social+Capital Partnership invested $15 million in SecondMarket, taking the leading private share broker’s valuation to over $200 million. Earlier last year, they had also raised another $13 million in funding by listing themselves on their own website.

SecondMarket’s financials are not publicly known, but the market believes that they generated revenues of more than $35 million in 2010. SecondMarket also claims to have been profitable over the past five years. They continue to earn the majority of their revenues and transactions from the consumer web and social media businesses. Analysts believe that this segment, which includes transactions for Facebook and Twitter, accounts for nearly 62% of their revenues. With Facebook expected to go public this year, SecondMarket would lose a big portion of their transaction revenues.

SecondMarket and U.S. Securities Law
SecondMarket is waiting eagerly for a decision on a proposal before Congress on public disclosure of financial information. According to the current SEC rules, all private companies that have more than 500 shareholders will have to make their financial information public. If the 500 shareholder limit were to be eased and the proposal approved by Congress, private companies like Twitter and Facebook could continue with their private holding status and let their financial instruments be traded on SecondMarket.

SecondMarket’s management also believes that by easing the 500 shareholder limit, private companies would relax restrictions on share trading and thus help increase transactions on SecondMarket. Analysts expect the legislation to come up for a vote by the full House of Representatives and the Senate early this year.

SecondMarket’s Expansion
Meanwhile, SecondMarket is looking to diversify revenue sources. They are moving beyond private share placement and were rumored to be in discussions to be a part of the syndicate for underwriting Groupon’s recent IPO. In addition, they are earning revenues through bankruptcy services. SecondMarket compiles data about bankruptcy asset transactions by helping companies that are filing for bankruptcy liquidate assets. The Second Market bankruptcy customer list includes Lehman Brothers, the assets of which they still handle.

Overall, the trend toward private stock exchanges is injecting additional liquidity into the system. One of the key checks and balances element is the fact that only accredited investors are allowed to participate in these financing exchanges. This keeps unsophisticated individuals from getting wrapped up in bubble–bust situations as we experienced in the 2000 dot-com meltdown.

Remember, we at 1M/1M, believe that entrepreneurship should be democratized, not based on speculation. Although additional liquidity is a good thing, these checks and balances are important to keep the system from imploding.