Just as the Securities and Exchange Commission is starting to take a closer look at the increasing amount of trading in private company stock, a new startup that’s been in stealth mode since August, 2009 is preparing to launch another way to trade private shares. The company is Xpert Financial which, through its registered subsidiary, Xpert Securities, brings to the table a tacit stamp of approval from the SEC and the Financial Industry Regulatory Authority (FINRA), or at least approval to begin operations as an alternative trading system (ATS). Existing secondary markets for private shares such as SharesPost and SecondMarket do not have the same standing in the eyes of the SEC, although it is not clear how much that matters at this point.
Xpert Financial will operate an electronic trading platform for private company shares. It is a registered broker-dealer with FINRA and it recently got approval from the SEC to run an alternative trading platform. Xpert Financial will be the first ATS approved for private stock sales. More common alternative trading systems are ECNs, or Electronic Communication Networks, for publicly traded securities. As an ATS, Expert Financial cannot call itself an exchange, which is why it changed its name from Xchange.
In contrast to “bulletin boards and phone-bank brokerages that have positioned themselves as stock exchanges,” as the company calls its competitors, Xpert Financial will be a completely automated, electronic trading system. It will also work with the companies whose shares trade on its ATS to solicit their approval (SecondMarket and SharesPost work with shareholders, not necessarily with the companies). Xpert will also provide a way for companies to share financial information with prospective investors. More disclosure would certainly be welcome in this opaque corner or the financial markets. The company is backed by angel investors including Tim Draper, who invested personally.
Of course, just because Xpert Financial has permission to operate as an ATS by the SEC that doesn’t mean that companies whose shares trade there wil be immune from SEC scrutiny. As these private trading systems bring more liquidity to secondary markets, the number of shareholders for any given company will increase and the greater chance there will be that a company will gain more than 500 shareholders. Once that happens, the SEC can require full financial disclosure just like a publicly traded company.
Update: A SecondMarket spokesperson notes: “SecondMarket is a registered broker-dealer, and we are fully regulated by both FINRA and the SEC. Also, working with the private companies is a critical aspect of our business model.” The difference is that it is not an ATS, and Xpert Financial is already trying to use that distinction in its marketing against the established players.