There are few of us in the tech sector willing to risk the damage to our mental health by casting our minds back to life before the dot.com bust, that time when Y2K equated to the promise of the Second Coming.
Those who can, will recall the principal symbol of those halcyon days, the herald of a Brave New World of computing, the paradigm shift to end all paradigms – the Portal.
Guaranteed to spell the end of the client/server architecture as we knew it, the portal promised an age when every piece of data known to mankind would be accessible via a transparent, personally configured, one-stop aggregator. Everyone rushed to promote their flavour of this must-have accessory: from Lycos to SAP, Windows was out and Portals were in.
As Wikipedia puts it in truly dry authoritative style: “In the late 1990s, the Web portal was a hot commodity.”
Now in a burst of optimistic retro chic worthy of a place in the eponymous book by Diana Eden and Gloria Lintermans, portals are back in the news. And, in a groundhog sort of a way one portal in particular is being portrayed as heralding a new era.
This time though it’s not promising a mere step change in computing as we know it – instead, its target is the technically more challenging rebalancing of the world’s capital markets.
Portals 1.0 promised to revolutionise the way technology users accessed their information, Portal 2.0 promises to revolutionise the way technology companies access their capital.
According to yesterday’s Financial News Online:
“Nasdaq is preparing to introduce a version of its Portal system for brokers and institutions that want to trade unregistered stocks, and bonds in the US private market, allowing centralised trading for the first time.”
This seemingly arcane initiative takes advantage of the SEC’s Rule 144 which allows
shares to be sold in the US to qualified institutional buyers, without conforming to the registration and disclosure requirements that apply to fully marketed public offerings.
Normally, it has to be said, such a technical announcement would barely capture the world’s attention. But apparently this isn’t merely another minor service to be offered by the tech sector’s market of choice – it’s potentially a panacea to the problem faced by early stage companies seeking capital.
And that, of course, is a very big problem.
Once upon a time, youthfully energetic technology businesses, their enthusiasm fuelled by the cash of savvy VCs, would move seamlessly from Series C to Nasdaq, acquiring the capital, paper and profile required to make a commercial quantum leap and to become truly global players.
Then Enron happened, the music stopped and the Four Horsemen of the Apocalypse were granted the freedom of the Plains. Now the Horsemen:
– the SEC;
– the Plaintiffs’ Bar;
– Nasdaq’s disinterest in small cap stocks; and of course
– Sarbanes Oxley
have terrorised the US Public markets and sapped the will to IPO of almost all of America’s finest next generation tech companies, leaving them stranded in private equity land – truly Nasdaq Orphans (NOs).
The NOs’ plight is a symptom of a greater malaise hitting New York threatening its supremacy in the global capital ecosystem.
So dire has the situation become, that Mayor Bloomberg commissioned a report by McKinsey to examine ways in which New York’s decline on the world capital market stage can be reversed.
And New York’s first tangible response is to launch a WMD, a Weapon of Market Domination, Nasdaq’s Portal.
At first sight it seems too good to be true.
Financial News’ Shanny Basar quotes Nasdaq CEO Bob Greifeld as saying the change:
“could be as significant to the capital markets as the founding of Nasdaq 36 years ago”
Which, given that Nasdaq’s exponential growth made the 20th Century tech industry what it is today, is pretty significant.
The article goes on to say
“Greifeld said he thought Portal would compete with the Alternative Investment Market, the London Stock Exchange’s small company segment, which has attracted 350 non-UK companies from 28 countries, including the US.”
Which, given that up until Portal, AIM was the only viable alternative for tech company IPOs, is pretty significant too.
So if it is true, it solves the Nasdaq Orphans’ problem at a single stroke.
All of those tech entrepreneurs whose 2007 plans call for a big capital injection but whose VCs had moved on to Web 2.0 and beyond, can breathe easy again. Just like the Cavalry in every Western, Nasdaq rides to the rescue in the nick of time.
No need to worry about London and AIM. Put away the travel guides, cancel the passport application, forget trying to remember what ‘Nomad’ stands for, dust off the SEC filings and get ready for Nasdaq via an IPOoP (IPO on Portal).
35+ years working in the tech sector on both sides of the Atlantic have tempered my natural optimism with a healthy layer of cynicism.
As Vince Lombardi must have said – “if it looks too good to be true – it is too good to be true”
One of the skills learned by anyone who has spent 3 decades in our industry is the ability to read between the lines of public pronouncements.
So, when someone says words such as “Nasdaq is preparing” and “Nasdaq plans to introduce…” and “subject to SEC approval….”
I hear “Pre-announcement”
Now don’t get me wrong – I have nothing against pre-announcements. In common with most in my generation, I have used the technique to freeze out the competition until my own product was ready on countless occasions.
The problem with Nasdaq’s Portal isn’t that it’s a bare-faced pre-announcement; it’s that it’s a bare-faced tease.
It is clearly designed to drive FUD (Fear, uncertainty and doubt) into the hearts of the Nasdaq Orphans looking to list in London by implying proof that New York is changing.
Unfortunately, if and when Portal does, eventually, see the light of day it isn’t going to solve the Orphans’ problem.
Trading equities on a truly public exchange like Nasdaq or AIM and trading them on the Portal couldn’t be more different.
A quick look at the following extracts from the conditions laid down in the SEC’s Rule 144 gives a clue:
1. Holding Period. Before you may sell restricted securities in the marketplace, you must hold them for at least one year.
2. Adequate Current Information. There must be adequate current information about the issuer of the securities before the sale can be made.
3. Trading Volume Formula. After the one-year holding period, the number of shares you may sell during any three-month period can't exceed the greater of 1%
4. Ordinary Brokerage Transactions. Neither the seller nor the broker can solicit orders to buy the securities.
5. Filing Notice With the SEC. At the time you place your order, you must file a notice with the SEC on Form 144 if the sale involves more than 500 shares or the aggregate dollar amount is greater than $10,000 in any three-month period.
Actually, you don’t need to read the Rule at all, John Jacobs, Chief Executive of Nasdaq Global Funds says it all in the Financial News article:
“it will appeal to companies that do not need to go public on Nasdaq but want to start trading in an institutional market without worrying about liquidity.”
An IPOoP’s not so much an IPO then, more of a LIMPO (Limited Invitation for Messy Private Offering).
Bad news for those who claim/believe that the US IPO climate is likely to change in 2007.
Good news for those that they compete with and who have already begun to line up their London IPO.
Concerned that what NASDAQ had announced -- excuse me, "pre-announced" -- couldn't be quite as bizarre as you suggested, I went and read the thing for myself. You did not exaggerate. Indeed, this whole "Portal" thing has an "other-worldly" quality to it.
There was a suggestion in the story about the NASDAQ pre-announcement that the ability to list on Portal was something that the private equity and venture capital funds really wanted. Oh, please!
ON WHAT PLANET DO PRIVATE EQUITY AND VENTURE CAPITAL INVESTORS LOOK FOR THE CHANCE TO EXIT BY RE-SELLING THEIR SHARES AT A NOMINAL MARKUP, PRIVATELY, TO OTHER INSTITUTIONS?
Certainly, that is not how the game is played on the Planet Earth. There is significant risk attached to investing in early-stage growth companies. If there isn't a reasonable likelihood of a big payoff, there isn't going to be any private equity or venture capital.
I'm not suggesting that the private equity and venture capital players are all terribly nice people. But there are fundamental reasons for what they do. These guys need a big payday once in a while to make up for the occasional train wrecks.
NASDAQ's "Portal" sounds to me more like rabbit hole into which a few CFOs will stumble and spend months wasting their time.
After this, I would sure hate to be the next NASDAQ marketing executive sent out to talk to a group of capital-starved growth companies about how "NASDAQ is your friend."
Posted by: REG CROWDER | March 02, 2007 at 06:29 PM