The market is eagerly awaiting big names in the Internet world, such as Facebook and Zynga, to name two, to make their appearance on the stock market. While it waits, “accredited” investors can trade in certain assets related to such companies under Securities and Exchange Commission (SEC) regulations. The SEC defines accredited individuals as those who have a net worth of at least $1 million or $200,000 in annual income and have access to market information. Alternative trading brokers offer a marketplace for these individuals as well as corporations to trade in otherwise illiquid securities. In 2010, private-share transactions were estimated to have grown from $2.4 billion in 2009 to $4.6 billion. Researchers estimate that number to rise to $7 billion this year, and most of it is expected to be headed SecondMarket’s way.
SecondMarket is a private share broker. Originally named Restricted Stock Partners, it was founded in 2004 by Barry Silbert in New York as an alternative registered broker-dealer. SecondMarket is regulated by the SEC and is a member of FINRA, MSRB, and SIPC. The company enables the trading of illiquid assets, including auction-rate securities, bankruptcy claims, limited partnership interests, private company stock, restricted securities in public companies, structured products, and whole loans. Additionally, the company has also become an online destination for accessing market data and building investor network.
SecondMarket charges commission of an estimated 3%-5% of the traded transaction value. In 2009, the firm’s private-company transactions totaled $100 million. That number is estimated to have grown to $400 million by 2010 and is projected to cross $1 billion by the end of this year. Last year, they recorded revenue of $16 million and at current transaction levels, revenue are projected to grow to $40 billion this year.
SecondMarket has received funding of over $19.2 million through First Mark Capital, Singapore’s sovereign-wealth fund Temasek Holding Pte, and Hong Kong–based Li Ka-shing Foundation Ltd as investors. Their latest round of funding was in 2010 where Asian investors bought a 10% stake in the company at $15 million, valuing the company at $150 million. Founder Barry Silbert owns 35% of the company. In March of this year, SecondMarket’s network grew to 53,000 registered participants, compared with 35,000 in 2010 and a mere 6,500 in 2009.
Facebook is among the biggest contributors to SecondMarket’s revenue. Last year, Facebook trades accounted for 40% transactions at SecondMarket. To diversify their portfolio, SecondMarket is increasing their inventory twenty times over by adding assets of 12,000 companies during the year. SecondMarket recently upgraded their platform to help support this growth. The new platform also includes social networking features such as enabling users to follow companies and friends and to receive updates on investments and securities.
Additionally, they are looking at growing in Asia. The investment by the Asian partners was aimed at helping SecondMarket expand in Asian countries, which have seen booming financial markets and in 2010 recorded more IPOs than any other region.