Capital Markets

Private Dreams

Could a stock market for private firms ever rival the big exchanges? One company, with help from the SEC, aims to find out.
Wilson LiJanuary 25, 2005

The idea has been around for decades: a public marketplace for private-company stock. Now Washington, D.C.-based Entrex Inc. claims to have created such a market through a partnership sanctioned by the Securities and Exchange Commission.

According to Entrex founder Stephen H. Watkins, the market has been set up as a coordinated effort with Niphix, a brokerage firm that operates an alternative online-trading system. Entrex provides the reporting infrastructure — as EDGAR does for the public exchange — while Niphix serves as the actual exchange.

“The fourth market,” as it is called by its creators, is in its initial stage. Although the model has been approved by the SEC, Watkins says the marketplace will take some 2 to 5 years to establish itself. “We are where Nasdaq was [originally],” he says. “It took them 10 years to create an exchange. We are just beginning — we’ve got to get companies to buy in; we’ve got to get the capital markets to buy in.”

Part of the appeal, says Watkins, is that the fourth market will provide exposure that private firms need to raise capital. “It will [provide] an increased valuation for companies because of the exposure, credibility, and liquidity that the market brings to shareholders,” he says.

But creating a market for private companies has hurdles. “Every couple of years, somebody comes around with the same idea,” says Georgetown University professor James Angel. But, he notes, “to be a public company, you need to be big enough to justify the overhead of all the reporting requirements of issuing stock.” In addition, “from a markets perspective, you have to be big enough to make it worth looking at by institutional investors.”

Although it’s too soon to pass judgment, Angel says Entrex might have a chance: “You never know; lots of big operations started small.”

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