In 2014, an Austrian entrepreneur offered investors a rare chance to purchase shares in Jumio, his fast-growing and profitable payments company. The deal was not a typical venture capital transaction. Instead of purchasing new shares, investors could buy out earlier shareholders, in what are known as private secondary transactions.
Daniel Mattes, who calls himself a “visionary” on his Instagram page and has been a judge on the Austrian version of Shark Tank, the American reality TV series for entrepreneurs, told at least one prospective buyer he had no plans to reduce his own stake in the business, according to a US Securities and Exchange Commission complaint filed in 2019. Mattes also signed off on documents that, according to the complaint, claimed Jumio made a small profit and revenues of more than $100m in 2013 — a significant sum for a three-year-old company.
Two years later, Jumio filed for bankruptcy, and the company’s shares became worthless. In reality, according to the SEC, Jumio had only made one-tenth of the revenues it claimed, and Mattes had bypassed his board of directors to sell about $14m of his own shares.
Jumio’s case highlighted the risks of an opaque but fast-growing corner of finance: the global market for shares in private start-ups such as TikTok owner ByteDance, Elon Musk’s SpaceX and payments company Stripe. In 2019, the market was estimated to host almost $40bn in lightly regulated trades, according to one participant, more than doubling its volume from 2014.
Recently, the market has been hotter than ever. Though private companies have largely tried to restrict trading, brokers say hedge funds, mutual funds and other institutional investors have begun pouring in, buying large blocks of existing shares in start-ups that are nearing initial public offerings or big acquisitions. Often, the investors receive scant rights to information on financial performance.
Technology upstarts and financial institutions including big banks have rushed to capitalise on the interest by brokering deals and forming trading venues, setting up a battle that could fundamentally alter the market’s structure and potentially allow companies to stay private indefinitely.
The boom reflects how cash-flush investors are clamouring for stakes in fast-growing businesses, with low interest rates pushing non-traditional funds deeper into private markets. To meet the demand, brokers now face two key challenges: increasing the supply of shares in desirable companies while preventing fraud and manipulation in a competitive market.
Until recently, private secondary markets resembled “that guy with a trenchcoat that’s selling you watches in Times Square”, says Inderpal Singh, who leads a private secondary market…
Go to the news source: Staying private: the booming market for shares in the hottest start-ups