When it comes to the IPO market, the Nasdaq (NDAQ) has usually been the top player, especially with hot tech companies. But over the past few years, the exchange has lost ground to its rival, the NYSE. But the Nasdaq is fighting back — and yes, the move involves leveraging technology.
First of all, last year was really a wake-up call for the Nasdaq. Despite a roaring bull market — and a comeback in public offerings — it had some challenges with its IPO business. Part of the reason was the mishandled Facebook (FB) IPO, which may have been a factor for companies like Twitter (TWTR) choosing the NYSE for their IPOs. In 2013, the NYSE snagged 25 tech and Internet deals while the Nasdaq handled 23 (according to a report from Dealogic).
But the Nasdaq has a plan: building a trading platform for pre-IPO companies. This is now possible because of the relaxed regulatory mandates from the so-called Jumpstart Our Business Startups (JOBS) Act, which allows private companies to have as many as 2,000 shareholders.
NASDAQ has also entered a joint venture with SharesPost, which is a pioneer of the pre-IPO market. The firm has facilitated transactions with companies like Facebook and LinkedIn (LNKD).
On its face, NASDAQ’s plan seems kind of counterintuitive. By making it easier for companies to get liquidity, there may be less incentive to do an IPO, right?
That’s certainly true. However, there has been a notable trend for companies to delay the timeline any way. So by getting a piece of the private market activity, the Nasdaq could get a lucrative revenue stream. Keep in mind that the trading can run thousands of dollars per transaction (because of the complexity, legal requirements and the procuring of a counterparty). According to a report from research firm Nyppex, the total transactions in the market came to $12.4 billion last year, up about 51%.
But a pre-IPO market should allow the Nasdaq to establish relationships with founders and senior executives who will be looking for some liquidity for their equity holdings. There will also be an opportunity to provide guidance on personal financial matters.
Something else: A pre-IPO market will show that Nasdaq is focused innovation, which should appeal to the insiders of early-stage companies.
Nasdaq will face competition, of course. For example, SecondMarket has carved out a strong position in the market. Besides, venture capitalists and hedge funds having been stepping in to provide insiders with liquidity for their shares. This can be attractive since it keeps the stock in friendly hands and the process can be rolled up into a round of funding, increasing the efficiency of a transaction.
However, Nasdaq has some big advantages. It has a long-standing relationships with investors and broker dealers. And of course, it understands the intricacies of managing a marketplace, which is no easy feat.
So how does all this help regular investors? For the most part, it means that there will be a chance to get shares in hot startups, which may turn into the next Microsoft (MSFT) or Facebook.
But there’s a hitch. To participate in the Nasdaq pre-IPO market, an investor will need to be “accredited,” which means having a net worth of more than $1 million (not including personal residence) or an annual income in excess of $200,000 for each of the two most recent years. So the market will still be fairly exclusive.
Despite all this, the Nasdaq pre-IPO effort does look like a smart move. It should help with revenues and provide a pipeline for IPO transactions. But most importantly, it is likely to be a helpful service to early-stage companies — which will ultimately help the Nasdaq build trust with the founders and senior officers of tomorrow’s public companies.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.