- The Washington Times - Monday, June 29, 2009

NEW YORK | Scott Painter makes his living betting on start-up companies, having played a role in launching 29 of them through the years. However, with the bad economy choking initial public offerings and acquisitions, Mr. Painter is now backing an idea that makes it easier for insiders like him to sell shares in their companies even before they go public.

SharesPost, which was founded by Mr. Painter’s business partner Greg Brogger, launched publicly in June. Through SharesPost’s Web site, Mr. Painter is trying to sell shares in several companies he helped found, including car-pricing start-up TrueCar.com. He also wants to buy shares in companies that are far from an IPO, like short-messaging site Twitter and business-networking site LinkedIn.

SharesPost is one of a few private stock exchanges that are emerging to fight what venture capitalists call a liquidity crisis. These exchanges give stakeholders an alternative way to trade their shares in hot start-ups like Facebook for cold, hard cash — without having to wait years for an IPO.

Employees at start-up employers often put in long hours but get salaries that can be 20 percent less than their peers at public companies.

In return, they get stock or options that they hope will be a path to sports cars and summer homes after their company goes public or is bought out.

Given this, services like SharesPost could help start-up workers get some cash while awaiting a distant IPO that might never even get off the ground. Most people won’t be in on the action, though, since these exchanges are only open to a small pool of buyers.

It’s not clear how much — or how little — stock has changed hands through them. In its short life, Santa Monica, Calif.-based SharesPost said it has executed one $25,000 transaction, while another service, New York-based SecondMarket, said it has completed about 40 transactions in the past year worth about $150 million.

Still, if they manage to thrive, these exchanges could help the economy. By selling shares on a private exchange, an investor can free up funds to put into other start-ups. Also, institutional investors could use these services to broaden their holdings to include fast-growing companies that have yet to go public.

The methods of these private exchanges vary. SharesPost uses an online bulletin board to introduce buyers and sellers. SecondMarket links the parties and lets companies set up their own minimarkets that they control, while Redwood City, Calif.-based XChange is rolling out an online system that will allow buyers and sellers to connect and directly trade shares for cash.

All are open just to institutional investors — organizations like venture capital firms or pension funds that manage at least $100 million in assets — and individual accredited investors. That category includes people with a net worth of at least $1 million or salary of at least $200,000 for the last two years.

The concept is not entirely new. Nyppex LLC, formed in 1998, facilitates private-company stock trades, and a few companies with similar offerings emerged during the last economic downturn but failed to gather much steam.

Among the problems: Determining a fair price for a private company’s stock is tough without much public information.

This time, however, employees and investors are more aggressively looking for a way to get a return on their dedication and funding. Only a dozen companies have priced IPOs in the U.S. this year, down from 35 in the first half of 2008, according to research firm Renaissance Capital LLC. In the same period of dot-com-crazy 2000, there were 219 IPOs in the U.S.

Besides the economy, start-up investors say the high costs and regulatory requirements associated with going public have also stymied many smaller, younger companies. According to the National Venture Capital Association, the median span from a company’s founding to its IPO was 9.6 years in 2008. In 1998 it was 4.5 years.

One factor is compliance with the Sarbanes-Oxley anti-fraud law, which was enacted in 2002 after accounting scandals at such companies as Enron Corp. and WorldCom Inc.

A key part of this law requires public companies to file reports on the strength of internal financial controls and fix any problems — steps that can be costly for a start-up.

Issues like this have “just made it more and more difficult for companies to make it to that next step,” said Thomas Foley, chief executive of XChange, which he developed with venture capitalist Tim Draper.

SharesPost founder Mr. Brogger believes his site has one solution to the slowdown in IPOs: Bulletin boards for more than 100 start-ups that allow buyers and sellers to post the price and number of shares they want to purchase or unload, and the ability to e-mail one another directly.

Parties wishing to make a deal can find the relevant contracts on the site to sign, and an escrow company completes the transaction, charging both sides $2,500. So far, a $25,000 deal — the site’s minimum transaction size — has been completed for 2,500 shares of electric-car start-up Tesla Motors Inc. at $10 apiece.

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