Upon review of the situation, the SEC ultimately allowed Spring Street to continue operating its Internet trading service--but under conditions that, for Klein and Spring Street, carried too much liability. Rather than cave, and in the true spirit of an entrepreneur, Klein formed Wit Capital Corp., an investment banking firm that will use the power of the Internet to raise money for emerging companies, particularly those concentrating on new media and Internet content.
At its core, the idea is simple: Wit Capital will operate a discount brokerage firm and, through those accounts, market IPOs. So far, Klein has raised $3.5 million for the venture and has been joined by a host of investment bankers from Wall Street firms, as well as securities-processing technology gurus such as Chris Keith, former chief technology officer of the New York Stock Exchange.
The emphasis on securities trading technology is hardly surprising. To address investors' need for liquidity while overcoming the structural challenges today's stock markets face, Klein will launch a new electronic marketplace next year called Wit Trade.
"The theory goes that the closer together you bring buyer and seller, the more efficient a market will be," explains Klein. "With the Internet, we have a way to bring people together that wasn't possible before."
Specifically, Klein refers to the middlemen on the New York Stock Exchange and the Nasdaq stock market who match buyers with sellers. Most of the time, these individuals provide an invaluable service. However, their unavoidable insertion between buyer and seller, combined with their own profit motive, sometimes corrupts the process to the detriment of investors and issuers.
But the Internet means buyers and sellers can meet electronically without a middleman. While the absence of this person brings challenges as well as opportunities, to Klein's way of thinking it brings more of the latter than the former. "This way, liquidity could develop slowly and fairly for public venture capital," he says.
When that happens, more investors can get into the market and get behind tiny emerging companies. And when the average Joe or Joanne has the opportunity to make venture capital investments, the amount of money available to entrepreneurs will make today's venture capital funds look like chump change.