Background is at Facebook, Twitter and peers for sale – privately.
My initial impression is that this could be an ingenious adaptation to an obnoxiously overregulated environment. Or it could be crushed by regulators and their enablers; given that a Republican Congress and President were willing to saddle us with Sarbanes-Oxley seven years ago, it is not easy to imagine our current complement of parasites reacting dispassionately to private stock exchanges.
Note that I do not meet the minimum qualifications (net worth $1M, annual income $200k for past 2 years); this is just to elicit discussion by knowledgeable people (the minimum qualifications for which I also do not meet).
3 thoughts on “Comment Thread for Private Stock Exchanges”
Once upon a time, I used to do this stuff for a living. I have not kept up with all of the rule changes, but the broad outlines have not changed. There are layers of issues here. I started out discuss some of them but discovered I would be writing a twelve page summary of Federal and state securities laws. Bottom line is that he might make it work, but there are boatloads of regulatory and compliance issues.
As an investment thesis, I am not thrilled by it. The companies that they will trade are, to say the least, not seasoned nor vetted. A few of them will make it. Most won’t. It will sort of be a rerun of 1997 — 2000, without Amazon. If you had real insight into the companies, you could make money, but you are a whole lot more likely to get scammed.
Time will tell but it seems like a marginal scheme. The only way this kind of exchange will succeed as a business on low trading volume is by charging high fees that discourage trade — counterproductive. If the exchange somehow becomes popular enough to profit with low fees it may be restricted by regulators. I think it’s likely that current trends in IPO business moving overseas, and in medium-sized companies choosing to remain private, will continue. Maybe there is also a role for the overseas bookmakers to make markets in pre-IPO stocks, but if so that might be another reason for traders to avoid “private stock exchanges.”
Size matters. It is the only protection individual traders get. I would not participate in any market or any particular equity without these 3 conditions:
1) The market is fluid enough to cash out my entire position in seconds.
2) My trading does not significantly affect pricing and trading volume.
3) The equity is widely held between the issuing company, institutions, and individuals.
Investors have better chances of success with fewer and more public variables. If the value of your stuff also depends on the capricious mood of a few market makers, you are simply a pawn in their game.
Best example: You can trade 10,000 shares INTC or YHOO instantaneously, picking up 3 or 4 cents on every swing, all day long. Nobody seems to notice me nibbling away. You can’t do that with Bruegger’s Bagels or King Arthur Flour or anything else in a private market.
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