NASDAQ Contemplates a Pre-IPO, Early Stage Index

More good news to open up the IPO pipeline

NASDAQ Contemplates a Pre-IPO, Early Stage Index
via VentureDen Funding Tips by Daniel Cimera on 5/8/09

In March of 2009, the tech stock trading group, NASDAQ, approached the SEC to request rule changes that would allow them to open an unregistered venture capital market. The new unregistered market would allow qualified institutional buyers (QIBs) and accredited investors to trade ownership stakes in startup and fledgling pre-IPO companies.



The rule that that NASDAQ is attempting to modify would open safe-harbor exceptions to accredited investors as well as QIBs. Currently, accredited investors may trade on an unregistered market, but may not resell for six to twelve months, creating potential liquidity hardship. The safe-harbor rule extension to accredited investors would provide better liquidity and transparency to venture capital markets.



Where Did All the IPOs Go?



The last few years have proven to be a detriment to the IPO market. Since many startup and seed companies backed by venture capital have an IPO exit strategy, the VC industry has suffered in this vital U.S. economic industry. In fact, only one venture-backed company has made an initial public offering on the NASDAQ over the last 12 months!



Some experts say that many VC firms are still investing in startup companies but avoiding an IPO by simply selling them to already established and larger public companies. That may not be what many entrepreneurs and business startups had in mind when they approached the VC firm for capital financing, but with most VC firms taking a majority stake in startups, entrepreneurs usually have no choice.



What NASDAQ is Attempting to Accomplish



With the rule change in the unregistered market, accredited investors, such as VC firms, could have more freedom in exchanging securities and have much more liquidity help. It does not, however, fix the problem of attracting retail investors needed for small cap market stocks.



The SEC has shown to be receptive to changes in regulatory rules in order to improve the market for smaller companies. During the last few years, the SEC has adopted changes in trade rules that were recommended by smaller business and the small business trading community.



How the New Rule Could Benefit the Economy



The new trading rule changes could ultimately help the economy. Since the decline of the IPO market, there have been fewer economic drivers to replace the lost investment engines. The fact is that in 2008 venture capital returns outperformed both the NASDAQ and S&P 500 indexes. While the public trading indexes saw losses of around –22%, VC saw positive, though modest, returns in early seed and later stage VC companies.



A freer unregistered market would open up more trading in pre-IPO companies. Since VC backed companies have historically been a major driver of the NASDAQ market, it is important to maintain ways to continue the capital formation of new companies and enhance trading in capital markets.