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Market Description (Continued)

Shareholders of privately held companies have seen their liquidity options dwindle over the past couple of years. The lack of a functioning IPO market and minimal M&A activity has caused the gestation period, or time from initial funding to exit, to swell to over 8 years. The traditional venture capital model relies upon a successful exit in 3 to 5 years, leaving many investors with a very real and very pressing need for liquidity. Employee-shareholders, consultants, angel investors and venture capitalists are being forced to hold on to their equity stakes due to the absence of a market for private company securities.

During the five years through December 2008, venture capital funds have poured over $131 billion into nearly 18,000 private company financings. While the objectives and holding periods of angel investors vary, it is also worth noting that they invested an additional $116 billion into private ventures during that same period. Couple the total private company investment volume with only 6 VC-backed IPOs and 325 M&A deals in 2008, and the liquidity issues become immediately apparent. Not only are individual and institutional investors getting locked into a longer investment, but employee-shareholders and consultants are unable to access a large portion of their net worth.

Compounding the liquidity issues facing companies and investors are the systemic problems for smaller companies looking to go public. The marketing and capital raising benefits of being publicly traded are far outweighed by the burdensome listing requirements that a public company must adhere to, as well as the difficulty in obtaining long-term sponsorship. Smaller companies often times have very thin trading volumes, diminishing the incentive for brokerage firms to publish research on them. In addition, the significant compression of trading commissions over the past decade has ceased making small-cap stock trading, market making and stock research sponsorship economical for sponsoring brokerage firms, further exacerbating the problem. Companies also take on extraordinary monetary costs to comply with the rules and regulations that govern public entities. Often, the price paid to be “public” isn’t justified, with the stock price languishing due to a lack of investor awareness and demand.

Exiting through an M&A transaction, the other liquidity option currently available, is often a less than optimal alternative. Many times the value of the acquired company is eroded as the target is being integrated into the acquirer. Shareholder value diminishes and the vision of the original entrepreneur and company is lost.

Now more than ever there is a need for a third liquidity option for private companies, and a way for them to continue to grow and become successful in any capital market environment. SecondMarket aims to afford private companies many of the benefits of being public without the added costs and regulatory burdens. The creation of a functioning and sustainable market for private company securities would not only provide a third major liquidity option for current shareholders, but it would also give the company exposure to interested outside investors who could be a value-add partner, potentially helping with future capital formation efforts.

Through SecondMarket, private companies have the ability to opt-in to an organized and controlled private marketplace environment. This platform enables early investors and employee shareholders of private companies to exit their investments in cooperation with company management. SecondMarket’s unique approach to solving the above-mentioned systemic problems recognizes the many issues incident to the development of a private company. The platform includes many administrative features, such as custody of physical stock certificates and a company specific data room. No longer will management have to deal with the administrative burdens of lost or misplaced stock certificates or transferability issues. At the same time, companies have the ability to streamline their shareholder communication through effective utilization of data rooms on the SecondMarket platform. Communication controls can be applied to current shareholders and company insiders as well as outside parties and interested investors. All of these features serve to reduce costs and time burdens on the company and allow for enhanced control by management over the market dynamics.

Should the company elect to do so, the platform also enables the company to invite outside partners, on a selective basis, from SecondMarket's member universe, creating relationships to help further the growth of their company.
 

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