Secondary Marketplace
November 23, 2022

Secondary Marketplace

Jake Safane

What is a secondary marketplace for private company shares?

When you think of private company shares, or stock in pre-IPO startups, your mind probably jumps to areas like VC funding rounds and stock options. When private companies issue new shares through these channels, the participants engage in what’s known as a primary market or marketplace. But that’s not the only way private company shares change hands.

A secondary marketplace is where trades of existing shares take place. Rather than a company creating new shares and selling them for the first time to buyers, secondary marketplace participants buy and sell stock that’s already been sold or granted.

So, when you think of the stock market, you’re probably thinking of the secondary market. Stock exchanges like the New York Stock Exchange and Nasdaq are secondary marketplaces for publicly traded companies.

For private companies, secondary marketplaces like Forge exist for pre-IPO investing. What was once more limited to the domain of institutional investors like private equity funds has now opened up to a broader pool of participants. Through a secondary marketplace, investors and startup employees can buy and sell securities with relative ease.

How does a secondary marketplace for private company shares work?

A secondary marketplace for private company shares works similarly to public stock markets, in the sense that buyers and sellers can come together via the secondary marketplace to trade private company stock. A secondary marketplace for private company shares facilitates the matching of buying and selling orders.

For example, after an employee vests stock options in a startup, they might decide to sell some of their shares pre-IPO. That way, they can get some cash now and diversify, rather than waiting for the possibility of the company going public or getting acquired. By selling through a secondary marketplace, they can get matched with an investor who’s interested in buying pre-IPO stocks. 

Why do buyers and sellers use a secondary marketplace?

Secondary marketplaces help facilitate trades between buyers and sellers. Think of the public stock market. It’s become incredibly fast and easy to open a brokerage app and trade stocks almost instantly via these secondary marketplaces, as opposed to finding a specific buyer or seller on your own and then dealing with all the transfer logistics.

While private secondary marketplaces generally aren’t as fast and straightforward as public ones, they’re still arguably much easier to use than conducting a transaction on your own.

If you want to buy shares of a hot new startup, would you rather:

  1. Contact employees at that company to see if anyone wants to sell their shares and then deal with the logistics of trading private shares yourself?
  2. Go through a secondary marketplace that finds a seller for you — perhaps one they already have lined up based on previously expressed interest— and handles the heavy lifting, like getting the startup to approve the transaction?

As you can see, the centralization of a secondary marketplace generally makes trading easier.

A brief history of private company secondary marketplaces  

There are a few different private company secondary marketplaces that you may have heard about. One is SharesPost, founded in 2009, which merged with Forge, completing its integration in 2021.1

Another private company secondary marketplace is Nasdaq Private Market, which acquired another secondary marketplace platform, SecondMarket, in 2015.2

Other platforms for conducting secondary market transactions also exist, and new ones could crop up as investors look for ways to trade private equity without necessarily going through a traditional financial institution.

Are secondary marketplaces for private company shares regulated?

Generally, secondary marketplaces for private company shares are regulated entities, somewhat like how stock exchanges are regulated.

In many cases, private secondary marketplaces are registered as broker-dealers by the Securities and Exchange Commission (SEC) and are members of FINRA/SIPC. Forge, for example, is a regulated broker-dealer, as well as operating an Alternative Trading System (ATS).

Can anyone buy or sell private company shares in a secondary marketplace?

To buy private company shares in a secondary marketplace, you generally have to be an accredited investor. That means you have to meet certain financial or professional requirements as set by the SEC such as having individual income over $200,000, or joint income of over $300,000, over each of the past two years, or a net worth of over $1 million, excluding primary residence, among other ways to meet accredited investor requirements.

To sell private company shares, however, you don’t have to be an accredited investor. However, private companies might have their own restrictions on whether you can sell pre-IPO shares.

Do you need a secondary marketplace or broker to trade private company shares?

While you don’t legally need a secondary marketplace or broker to trade private company shares, going through a centralized platform can streamline the process. You might have a hard time finding a buyer or seller on your own, let alone dealing with issues like compliance that come with this asset class.

Want to learn more about buying or selling private company shares? Visit our secondary marketplace Forge Markets.
 

Key Takeaways

What is a secondary marketplace?
A secondary marketplace for private company shares works similarly to public stock markets, in the sense that buyers and sellers can come together via the secondary marketplace to trade private company stock. A secondary marketplace for private company shares facilitates the matching of buying and selling orders.

Are secondary marketplaces regulated?
In many cases, private secondary marketplaces are registered as broker-dealers by the Securities and Exchange Commission (SEC) and are members of FINRA/SIPC. Forge, for example, is a regulated broker-dealer, as well as operating an Alternative Trading System (ATS).

Who can buy private company shares on a secondary marketplace?
To buy private company shares in a secondary marketplace, you generally need to be an accredited investor, which means having individual income over $200,000, or joint income of over $300,000, over each of the past two years, or a net worth of over $1 million, excluding primary residence, among other ways.

Who can sell private shares on a secondary marketplace?
There are no accreditation requirements for sellers but you must provide proof of holding the shares you are seeking to sell.

 

About the author: Jake Safane specializes in financial reporting and is a former thought leadership editor for The Economist with articles appearing in Business Insider and The Washington Post among other media outlets.

1 Bloomberg

2 Techcrunch

PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

The information and material presented in this article is provided for your informational purposes only and does not constitute an offer by Forge Global, Inc., Forge Securities LLC or any of its affiliates (collectively, "Forge") to sell, or a solicitation of an offer to buy any securities and may not be used or relied upon in connection with any offer or sale of securities. An offer or solicitation can be made only through the delivery of final offering document(s) and purchase agreement and will be subject to the terms and conditions and risks delivered in such documents.

This article does not constitute an offer to provide investment advice or service. Registered representatives of Forge Securities LLC do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services. Securities referenced in this article may be offered by Forge Securities LLC, member FINRA/SIPC.

Forge Securities LLC is a wholly owned subsidiary of Forge Global, Inc. Certain affiliates may act as principals in such transactions. Forge Data LLC is an affiliate of Forge Global, Inc. and Forge Securities LLC.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice. Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

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1 Bloomberg

2 Techcrunch

PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

The information and material presented in this article is provided for your informational purposes only and does not constitute an offer by Forge Global, Inc., Forge Securities LLC or any of its affiliates (collectively, "Forge") to sell, or a solicitation of an offer to buy any securities and may not be used or relied upon in connection with any offer or sale of securities. An offer or solicitation can be made only through the delivery of final offering document(s) and purchase agreement and will be subject to the terms and conditions and risks delivered in such documents.

This article does not constitute an offer to provide investment advice or service. Registered representatives of Forge Securities LLC do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services. Securities referenced in this article may be offered by Forge Securities LLC, member FINRA/SIPC.

Forge Securities LLC is a wholly owned subsidiary of Forge Global, Inc. Certain affiliates may act as principals in such transactions. Forge Data LLC is an affiliate of Forge Global, Inc. and Forge Securities LLC.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice. Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.