A local bank and a high-growth startup don’t seem to have a whole lot in common, but they do have one similar problem: shareholders can’t turn their ownership stake into cash easily. On Wall Street, of course, portions of companies are bought and sold all day long. For companies not listed on these public exchanges however, buying and selling shares has been more complicated. And with credit still hard to come by for many business owners, new ways are emerging to turn at least part of their companies into cash.
In the private sector -- from high-growth startups to community banks -- alternative marketplace SecondMarket is making that possible. The New York-based online marketplace provides a platform for private companies to sell shares of their businesses.
Initially popular for allowing employees of superstar startups like Facebook and Pinterest to trade company shares before going public, SecondMarket has since added a new type of private company to its roster: community banks.
While looking for other private companies that could use the same ability to raise cash, SecondMarket zeroed in on the nation’s network of community banks: 7,500 strong across the nation, 6,000 of which are private, according to SecondMarket spokesperson Aishwarya Iyer.
SecondMarket launched a pilot program in February allowing community bank investors to buy and sell their shares online. The pilot is focused on community banks in four states: New York, New Jersey, Texas and Pennsylvania. By summer, SecondMarket will decide whether to continue with the program full time.
To be sure, there are reasons to be cautious of selling shares of your company or bank on a platform like SecondMarket. Most notably, you lose some of the benefits of being a private company, like the privacy. The value of your shares on SecondMarket rise and fall in response to public sentiment, just as they do on Wall Street, and that trajectory is available for anyone to see on SecondMarket.
Anyone can sign up for SecondMarket (online registration is free) and become a “watcher” of a particular bank or company to receive company updates, such as funding news or management shake-ups. However, only institutional investors or an individual who is an accredited investor can purchase shares.
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One of the attractions for investors is the ability to invest in “hyper-local growth,” says Iyer. “Investors from Texas want to invest in a Texas bank.” And for the shareholder, the attraction is being able to convert their investment into cash, says James Arnold, the executive vice president of Lubbock National Bank, headquartered in Lubbock, Texas, with total assets of about $750 million. Lubbock National Bank has fewer than 200 shareholders and some of them are nearing retirement and want to cash out. Now they will have that opportunity.
“It is safe to say that all across the country, those who own community bank stock, the profile is probably older than younger,” says Arnold. Traditionally, buying a share of a community bank has been perceived as a long-term investment. But, being on SecondMarket will allow Lubbock National Bank to appeal to younger investors who may not be willing to lock up their money for so long, says Arnold.
Readers, how would it change your business to be able to buy and sell portions of your company before it goes public?