A recent article in the Washington Business Journal discussed the online equity exchange, SecondMarket, and its seemingly increasing foothold in the Washington, D.C. region.
According to the article, SecondMarket, which had previously been much more active in the Silicon Valley, was just starting to see interest from investors in Washington, D.C. based technology firms.
But just what is SecondMarket and why is it becoming so popular?
When the Sarbanes-Oxley Act of 2002 was passed, it drastically increased the amount of scrutiny that companies undertaking the IPO process were subject to. It also significantly increased the overall cost and prolonged the time needed for a company to go through the IPO process.
What resulted was? a situation where typically only larger companies with revenues of $100 million or more can really consider an IPO. Unfortunately, the IPO used to be the best way for investors and executives at emerging growth companies to gain liquidity. In fact, these companies used to struggle to get venture funding unless they intended to go public one day.
That’s when venture capitalists starting talking about a secondary exchange where they could sell shares of stock in privately held companies that didn’t have the same reporting requirements. SecondMarket is that secondary exchange.
Second Market was established in 2004 for restricted securities in private companies and later opened up in April 2009. And unlike the claims of the Washington Business Journal article, SecondMarket and its interest in the D.C. area’s technology community are not new. Executives and investors of private companies in the Nation’s Capital have been using the exchange to increase liquidity and sell shares to accredited investors since 2009.
Regardless of the liquidity that Second Market can bring to executives and investors at privately owned companies, it will never eliminate the need for companies to undergo the IPO process and go public. When a company goes public, typically valuation goes up considerably. Getting the greatest valuation for a company more than justifies the expense and hassle of the IPO process in our post Sarbanes-Oxley business market. The IPO process also opens up investment in the company to ordinary individuals other than just accredited investors.
Although SecondMarket may be gaining steam in the Washington, D.C. region, it’s not a new concept. The exchange’s ability to help increase liquidity for investors and executives has been driving its increased interest here in the Nation’s Capital, but it will never replace the IPO process and the benefits it can have for a company.