My name is Gregory Terzian, I am the co-founder of OpenShares and I will attempt with this blog to discuss the problems that common shareholders of VC backed companies face and we are trying to solve for them. This blog will also discuss the matters of private shares and how they are valued, sold and transfered from buyer to seller. All legal matters and financial regulations pertaining to that process will be discussed.
Let me start with a little intro about how we came where we are today.
I’ve started working on the idea of OpenShares in November of last year, in London, after getting happily fired from my job as a bond salesman. The idea basically began as ‘Secondmarket for the European tech scene’, until myself and my co-founders Caspar Nadaud and Olivier Tubach realized, thanks to the help of our legal counsels at Taylor & Wessing, that this meant having to obtain authorization from the UK Financial Services Authority which meant to face all kinds of high upfront costs and bureaucratic chores.
We never intended to act as a broker of sorts and actively match buyers and sellers of private shares, but due to the structure of financial regulations in the UK, we would have been caught by fiinancial regulations even if we operated as a passive platform where users were merely given tools to ‘trade’ with each other independently.
We then set our sights to the US, where regulations are such that either you act as a Broker/Dealer or you don’t, and if you don’t you can operate as an unregulated entity. Furthermore, we found out that Sharespost, another private share marketplace, was actually operating as such an unregulated passive entity.
This was all great news, until news came out that Sharespost had just settled to the tune of 100k with the SEC, which included a personal settlement with the CEO Gregg Brogger for ‘willfully breaching securities law’. This was obviously disappointing news and threw our entire model into doubts. However I still had one last hope: Sharespost had been operating since 2009, initially charging a monthly subscription fee and nothing more, but as their business model evolved over the years they started indirectly charging commissions on trade via a third party broker who matched buyers and sellers. The SEC settlement seemed to focus on the years 2010-11 of their operations, exactly the period when they teamed up with this broker. This left the possibility that their 2009 operating model was perfectly legal, and that is was their activities in the subsequent years that triggered the breach of securities law.
Fortunately, I stumbled upon a Great Blog Post, entitled ‘Lessons in How Not to Set Up A Market for Private Company Securities‘ from Vanessa Schoenthaler, a lawyer from NYC which subsequently become our legal counsel. From this blog and the actual SEC letter of administrative proceedings, I learned that Sharespost made several grave mistakes which squarely put them in broker/dealer territory. Among others, their executives became involved in helping users enter into transactions via the platform, and commissions were being charged for each trade by a third party broker, and Sharespost would then share in those commissions. Research was being paid for by Sharepost and posted in their website, and finally an affiliate of the company set up and managed several funds to invest in private company shares, and units in those funds were sold via the Sharespost platform.
All in all, it seems like Sharespost was trying far to hard to act like a broker while remaining unregistered as such. In fact they had a broker application pending and are currently registered as a broker/dealer. Secondmarket has always been registered as a broker, and so are the more recent entrants into the private shares marketplace such as Expert Financial, a start-up and GFI, Knight or Liquidnet, long time brokers who recently branched out into the market.
The Sharespost situation was a great lesson that taught us that the last thing you want to do is to try to be a broker without being registered as one. The business of matching buyers and sellers and effecting transaction in securities is best left to those with a legal mandate to do so. However, this does not mean that every aspect of the private share markets needs to be handled by brokers. We had a feeling that there were still many problems left to be solved in this nascent market, and that not all of them required a broker license to solve…