Barry Silbert: A New Vision for Capital Markets [Entire Talk]

Barry Silbert is the founder and CEO of Second Market, which he founded in 2004. It is arguably the world's largest marketplace for buying and selling alternative financial assets. And we'll let him define that for you if that's new to you. But that essentially includes private company stock. And what makes this so exciting is he's been, he and his company have been in the Wall Street Journal and similar types of press a good bit over the last year because of Facebook and Zynga and Twitter and some others, but essentially Facebook. So he's been recognized as a terrific entrepreneur with all sorts of awards. He went to a college in my hometown, which I admire a great deal. Emory University, have you heard of that? It's a wonderful school in Georgia. But without further ado, let me let him explain to you which is really a hot, hot topic right now. And we're so happy to have him at Stanford. Welcome, Barry.

Hello everybody. So it is really great to be here. 1. As a first time entrepreneur, I looked at everybody who has done this before and it really is humbling to be in the same group of entrepreneurs of speakers. So what I'm going to do today is tell you how to turn an Excel spreadsheet into a $150 million business. So I had like three people so far tell me that this is like a fun crowd. Is this a fun crowd? Yeah. Okay, good. So yeah, yeah, let's get excited. So what I'm going to go through today is first talk about my story again, first time entrepreneur. I'll get into how I got to where I am today, talk about the, the second market history, then talk a bit about the public markets, what the heck's happening, and after that, a vision that Second market has for the future. And then finally I'll leave you with a few lessons learned from me. So who am I? So I was born in Washington, D.C. grew up in Gaithersburg, Maryland. Any Marylanders here? DC. DC. Look at that, we got two, two Midlanders in the house. Awesome. As Tom said, I went to school at Emory down in Atlanta. I was in the business school program, so focused on finance and graduated in 1998. So as I'm thinking about this presentation, thinking about what am I going to talk about my background, recognizing everybody, that I'm a first time entrepreneur. I don't have all these successful exits to talk about. I haven't done this or done that, but I have done some things. So this is my illustrious career to date. So I started off mowing lawns, shoveling Driveways for money, like any suburban kid would do. Around the age of 1112, I got involved in baseball cards. So I started buying and selling baseball cards as a business. And then I decided that there was bigger money in being a backroom stock clerk working in shoe stores and liquor stores. So I was like the guy putting 40s back in the fridge at the liquor store. I have no idea what my parents were thinking, but paid big money. And then shortly thereafter I got really involved in the stock market, started investing. I took my bar mitzvah money, bought a bunch of stock, and eventually I got a job in a brokerage firm where eventually they sponsored me to become a stockbroker at the ripe old age of 17. So I was actually the youngest person ever to become a stockbroker. After that, while I was in college, I worked at Smith Barney. And then my first real job was at Bear Stearns in New York. And then after graduation I went to work at Houlihan Loki, which is an investment bank in New York. So as I was thinking about my background and I was thinking about all these different jobs, I was reflecting on my professional career and thinking which of these jobs had the most profound impact on me as an individual. Anybody want to take a guess of these choices? What do you think the most profound impact? Just yell it out. Baseball. Is it that obvious? Okay, so I was enlightened when I thought about this. And so I'm going to take you back to, let's call it 1987. I was a 13 year old kid. I thought I was pretty hot shit back then, but I was scrawny, sporting the bowl cut. I would go to these baseball card shows about once every two weeks and I would take my baseball cards in a milk crate and I'd lug them to the baseball card show. And I set up this table. And I remember borrowing 30 bucks from my parents to buy this glass display case to make it look like professional people are not going to see this 13 year old kid selling baseball cards and think I'm not a professional. But anyway, so I was doing these baseball card shows, making some money, and it was eye opening because I'm now reflecting back on that experience. And what I came to realize was the baseball card market itself was my first exposure to illiquid assets, to inefficient markets. And what's really interesting about it is that that market was basically, it was fixed. So you had these dealers who professionally made money off of buying and selling baseball cards. And then you had collectors and you had these collectors Me and other young people and older people would buy these cards from these dealers. And it always surprised me that somehow, some way these dealers knew like two weeks before when the pricing guide came out every month, which were going to be the hot cards, which were going to be the cold cards. And you know, looking back on it, it was my first appreciation for the need for transparency, for centralization, for basically not allowing the big boys to control all the information. So it took me 16 years to again see this type of dynamic. I was at Houlihan Loki doing restructuring work. And for those of you who don't know what that is, we would basically get hired by either the companies or the creditors to essentially kind of restructure or break apart these companies. And we would have to kind of sell off their assets. And what happened again and again and again is we would get phone calls from these bondholders who got a bunch of stock in companies like Enron and WorldCom, all these kind of reorganized companies, saying, hey, I need to get out of this. The light bulb went off and I said, you know what, that's a really interesting business idea. I was doing banking for five and a half years. I was a board banker. And I said, I'm going to go start a business. But what's interesting is as I was thinking about it and researching this world of illiquid assets, what I quickly realized was there are trillions in and trillions of dollars of these types of illiquid assets out there and you don't see a very efficient market. And I think that there at the time, I thought there was a tremendous opportunity to create some real efficiencies. So like any good banker, I left and took a long vacation in Hawaii with my wife. My wife is here, by the way. And I just kind of decompressed. I was, I was doing 120 hour work weeks. And so I got back from this really relaxing vacation and started putting together a business plan. So I did an investment banker's version of a business plan. It was like 100 pages, charts and graphs, and it was like, I mean, it was a work of art. And I started sharing it with people that I knew, people that I trusted. And the business plan essentially contemplated us raising $2 million. We were going to go build this awesome ebay platform and then take over the world. And so I remember distinctly one person came back to me and said, okay, this idea for a business, it's a good idea, but screw technology. You don't need technology for this business. So why don't you Just get going. Don't go try to raise a bunch of money. Don't go try to build a whizbang platform. Just open your doors, start a business. So that's what I did. So in the middle part of 2004, I put $50,000 in the bank, opened up a bank account, and started working on the next version of the real business plan. Eventually was able to secure some angel funding. We raised about $350,000 from a bunch of angels that you've never ever heard of, because I didn't know anything about raising money from angels. So looking back, I guess the $1.7 million valuation, I probably sold too much of the company, but it got us started. But what was really, really interesting was when we opened up our doors in the early part of 2005, it was five of us, five telephones and an Excel spreadsheet. That was it. That was our marketplace. And the funniest part is the New York Times picked up our launch as a story and left out the fact that it was just a bunch of us in a room making phone calls all day long. But because we launched that way, because we just went at it, we were profitable on essentially the first day because we had not built a bunch of infrastructure, we hadn't wasted a bunch of time trying to build a whiz Bang platform. So in our first year in 2005, we did about a million dollars in revenue. 2006, we did about $2.5 million in revenue. Now, at the time, we had only focused on just one illiquid asset class, and that was restricted stock in public companies. And we certainly knew that eventually we were going to get involved in other asset classes. But for us, that was enough of a business. So along comes 2007, and we're on like a $5 million run rate. Very, very profitable. And we get a phone call. I wasn't getting venture phone calls often, but I did get a phone call from FirstMart Capital, a venture fund in New York, saying, okay, we like what you guys are doing. We see that at this point we had built the first version of a platform and, and they said, we like what you're doing. We think there's an opportunity to create a more scalable business, help you get involved in other asset classes. We want to invest. And at the time I was thinking, okay, I'm a first time entrepreneur. I never wanted to look back and say, if we had only raised that money from this venture capital firm, we'd be still around today. So we ended up raising $3.8 million from FirstMark at about a 16 million million dollar valuation. And so with that money, we started aggressively hiring, started building technology, our next version of our platform. And in 2008, the wheels really fell off the economy and we were incredibly well positioned to expand our marketplace, expand our platform beyond just this one asset class. We got involved in auctionary securities, we got involved in bankruptcy claims. We got involved in really toxic stuff, the kind of the toxic CDOs and mortgage backs. We got involved in private company stock, which I'll come back to. And then we got involved in whole loans and things like that. So business is taking off, doing really, really well. But a year ago we then got a phone call from folks with Li, Kai, Sheng and Tomasek saying, okay, we love this business you're doing. We love the private company market. We want to get involved and help you take this business to Asia. So we raised $15 million from Lika, Shing and Tomasek about a year ago at $135 million valuation. And that money was used for really for scaling and for expansion into Asia. So today we are, I think, arguably the largest marketplace for buying and selling alternative investments. We have about 140 employees. We're based in New York, we have an office in San Francisco, office in Hong Kong, and an office soon to have an office in Israel. And I'm going to attack a popular misconception. We are in fact regulated. We're very regulated. We're regulated by the SEC, we're regulated by FINRA, we're licensed in all 50 states. We got an enormous legal and compliance team. And as you can see from this chart, the business has really taken off over the past year or two. So there's a number of participants. If you understand the power of the network effects, that's what we're starting to see now in our business. So the private company market. So I'll start off with kind of how this came about in late 2007, early 2008. It started with, as Tom mentioned, Facebook. So remember at the time we were only just in one asset class, maybe we were in two in auction rates. But we had not yet launched this private company market. And we got a phone call from a former employee at Facebook saying, okay, I just left the company, I need to go buy a car or buy a house, I don't know what it was. Could you help me find a buyer for my stock? And we said, sure, Facebook, cool company. And we had this big network of buyers. Let us see if we can find a buyer for this. What was really interesting at the time was that there were institutions that were willing to buy Facebook stock without any information. They had really nothing beyond just the Microsoft valuation and maybe the stock option price. Yet they were willing to deploy millions and millions of dollars into the stock at that point in time. Obviously it was a good investment decision for them. But we said, there's something going on here, because as we started trading Facebook, we then started getting calls from other shareholders and other private companies who said, hey, I want to do this too. I want to sell my stock. So then the light bulb went off, said, ok, it's now time for us to do this. It's now time for us to get involved officially in this private company market. So the next thing we did is we went on a bit of a roadshow, met with a bunch of venture capitalists and lawyers and bankers to say, ok, we're going to go create this marketplace for private company stock. What do you think? And you want to guess what the response was? Ok, so the response was, it'll never work. There's no need for it. You're going to fail. So, of course, what do we do? We launch a private company market. So today or over the past 18 months, what you can see is the volume has increased significantly. You can see in 2008, we did about $30 million. And this is just private company stock went to about 100 million in 2009, 360 million in 2010, and this year has started off very strong. So as this market's taking off, I'm getting this question more and more from people, and then it's starting to be asked in the press, why go public? And so historically, it's important to know why companies have gone public. There's really kind of four reasons. One is it's to raise capital. It's traditionally been kind of the easiest, most cost efficient way to raise equity capital for larger companies. Two is liquidity for shareholders. Third, it is to have a currency that you can use to buy other companies or to pay your employees. And then lastly, it was a branding event. So what's interesting is on the first three, the secondary market, the private market, is now actually starting to address these first three objectives. The fourth one, going public, used to be the pinnacle of success for companies, but today it's not. Yes, that is Snooki ringing the bell of the New York Stock Exchange. Yes. So what a long way we've come from what this fine institution was originally created to do. But in all seriousness, I don't think A lot of people realize that over the past 10 years, the IPO market has been dying a slow, slow death. Now, there's a lot of information on this chart. So I'm going to point out kind of what is important for you to look at. So one is the number of IPOs. So if you look at the chart, the number of IPOs, historically speaking, you look in the 90s, it was averaging 400, 500, 600 IPOs per year. Yet over the past decade, it's now averaging what, 150 IPOs per year. And this was even during the 2000-2007 timeframe where when things were pretty healthy in the economy. So that's scary. But also look at the colors on this chart. So the blue are companies that are raising less than $50 million and the orange are ones raising more than $50 million. So what you've seen is in the past, smaller cap companies represented about 80% of the IPO market. One's raising less than $50 million. Today, it has completely shifted to the opposite. So the companies that are getting public, they're just much larger companies, which is really, really bad for us as entrepreneurs. So what happened? I think if you were to kind of look at the causes for this, the death of the ipo, I think you can describe it as, it's really kind of the unintended consequences of some, probably some well intentioned actions. So the first cause, which is surprising to many people, started with all of us, all of our parents, all of our friends, moving money away from stockbrokers into online trading firms. Because what used to happen is everybody would have a stockbroker and that stockbroker would call you up and say, hey, I just found this great company. It's named after a fruit. You should buy the stock. And you would say, okay, great, I'm going to buy that stock. But that just doesn't happen anymore. It's all self service now. So we lost hundreds of thousands of brokers who used to be pushing smaller cap stocks. Next was decimalization. So what decimalization is, is there was a time when stocks were traded in increments of eighths and quarters. And so there was the spread between the bid and the offer. And it was then shifted to decibels, like basically pennies. And so while that was really good for us as investors, it was lower transaction fees. It was terrible, terrible for Wall street and the market makers. And I know you're saying, well, it was me. Market makers aren't making as much money. The problem is that that money that they were making was being used to pay for research. So what happens is as these banks can't make money trading these stocks anymore, they stopped covering the smaller cap companies. Next in 2002 was Sarbanes Oxley. And I think a lot of people think that Sarbanes Oxley was kind of the cause of all this. It really was probably one of the final nails in the coffin. So Sarbanes Oxley just made it a lot more expensive for companies to go public and be public. And then after that was the research settlement that Spitzer pushed through, which essentially eliminated the ability for investment banks to be able to pay their research analysts based on investment banking fees. So what happened is these banks, the research analysts, they couldn't make money anymore from the trading. They couldn't make any money from the investment banking. So all the research now has shifted to the very, very large companies, which is terrible for small cap companies. And then you had the proliferation of short sellers and then a huge increase in class action lawsuits. So as a result of all that, it's now taking companies almost 10 years to go public, whereas in the past it used to take about half that time, like four years, five years. And so think about that for a second. Ten years to go public. That doesn't work for anybody. That doesn't work for venture capitalists, doesn't work for angel investors, and most importantly, it doesn't work for employees because no one joins a company with the expectation that they're going to stay at that company for 10 years. Pretty depressing, right? Yeah, I mean it gets worse. So anybody know what high frequency trading is? Okay, can someone describe what.

36 trillion.

So what are high frequencraders doing?

What's they're front running everybody else. Basically you can provide liquidity and scalp rebates, you can run momentum, you can front run, let's see, news events. And you can use sophisticated algorithms to pick out some mutual fund that wants.

To make a big buy.

And you jump in the middle and scalp off all sorts of things spread.

In a nutshell, they're screwing the market.

Yes, in a nutshell, they're screwing the market. So high frequency trading, it's a way of trading where using computer algorithms are taking advantage of inefficiencies in the stock price by using high power computers and servers that are co located with the major exchanges. Now the scary thing is high frequency trading now represents over 60% of trading in the public markets. 60%. Ten years ago it was less than 10%. So we've seen A shift of all of the activity into this high frequency casino type trading environment. And as a result of that, the average hold period when someone buys a share of stock in the public market has dropped. In 1970, it was five years. Today it's 2.8 months. So think about that for a second. So if you're a public company CEO, the average buyer of your stock every day is either going to be a computer or. Or is it going to be someone who only cares about your quarterly earnings? And could you imagine running a company thinking only about what effect your decisions are going to have on your quarterly earnings? So I have a little video for you. Was anybody watching TV on May 6th last year? Okay, you've heard of the flash crash. Okay, so hopefully this will work. Volume up, ready to go. Okay.

Maybe, I believe maybe unprecedented. You're not. Talk about capitulation. Let's take a look at P and G. All right, this is going to say everything. P and G is now down 25%.

That's true. If that stock is there, you just go and buy.

It can't be there. That is not a real stock was down. All right, this is an unprecedented Proctor Gamble.

They reported a decent quarter.

Is there a hedge fund that is liquidating? Is there a distress.

A 49 and a quarter? Okay, five minutes later, Back up.

All right, it was down what, 23% then four minutes later it was down 24%. Then we made that comment of that is absurd.

What is?

I mean, machines obviously broke.

The system broke down. You hear what Kramer just said? The machine obviously broke. The system broke down. So I don't usually agree with most anything Jim Craner said, Jim Cramer says. But I agree. Yeah, look, I think the public markets are, they're permanently broken. And I think that there's an opportunity here to create an entirely new exchange, an entirely new marketplace that's good for companies. Because I'll tell you what, the New York Stock Exchange and nasdaq, they're not focused more on consolidation. They're focused on cost cutting. They're focused on clearing and derivatives. They're not focused on small companies, on getting those companies listed on the exchange. So we have a vision. But before I tell you what the vision is, I'm going to tell you what the current system has looked like. So traditionally you would start a company and you would raise some angel money, you raise some friends and family money, you do a venture round and then you would go public or you would sell your company. And that was kind of a five year time frame. And that just doesn't happen anymore. This is the new vision. So starting at five years or beyond, companies will list on second market. And that listing will essentially serve as either a spring training to basically enable that company to grow to the point where, where they can go public if they want to, or I think over time what you're going to see is more and more companies choosing to stay private and choosing to be a part of the new market structure that we've created, which I'll describe in a minute. So how are we doing it? We started off with enabling investors to set up profiles on second market. So you saw we have 60,000 participants now in the system. And so what we're doing is we're enabling investors to essentially tell the world who they are as an investor, what their bio is, what they've invested in the past, what they're looking to invest in. We've enabled them to connect with other investors, to share ideas and to collaborate on investment opportunities. And essentially what we're trying to do is turn your second market profile into your investment profile. Like Facebook is Your social and LinkedIn is your professional. And then what we've done is we've created profiles on 13,000 companies. And what we're doing is we're encouraging these companies to essentially take ownership of their pages on SecondMarket to take over their profile. And the idea is this is the company's profile to the investing public. And what's really cool about this is we are now crowdsourcing, which are the companies that investors want to invest in. So we're capturing data from those 60,000 participants who say, hey, I want to invest in that company. And we're also capturing data from the people who hold stock in those companies. Who wants to sell? Then what we do is we take all that information and we take it back to the company. Now, we will not create a market for a company's stock until they opt in, until they list. But what we're enabling them to do is to essentially make a data driven decision about when they want to actually create a market on second market. Now, our market model, as I alluded to, it's much, much different than what you're used to in the Nasdaq or New York Stock Exchange. What we're doing is we're enabling the market to conform to the company and not forcing a company to conform to the market. What I mean by that is when a company decides to start trading on second market, they decide the rules. They decide when the market's open. This is not a 24,7. Market. In most cases, this is a market where maybe the company has an auction once a year, maybe it's one week a quarter where they allow people to trade. The company also gets to decide who the buyers are, company decides who the sellers are, and the companies decide how much information they want to disclose to potential investors. So why is this a great thing? Well, if we can enable companies to go the distance to kind of go big, we're empowering them. We're empowering them to be able to not have to sell themselves and have a. I mean, you guys saw the Cisco flip news. Crazy, crazy two years later. And we're also enabling them to not have to try to go public if they don't want to, or they're going to have some type of failed ipo. It's great for the employees because employees can finally taste some of that value that they've created starting in years 5, 6, and 7. And from a public policy perspective, it's also really good for our country because it is these companies, these smaller companies that are going to create all the jobs, and these are the ones that are going to really innovate. And this is the type of company that we want to support as a country. Let's be waving the flag for you guys. Okay, so some lessons learned again, First, I'm an entrepreneur, so I'm learning every day still. So one is do not fear the established. When I first started the company, I was really scared that we were going to be just crushed by the New York Stock Exchange or NASDAQ or Goldman Sachs. And after a few years, what I realized is these large companies, they're so slow to move, they're so slow to adapt, and they just simply don't innovate. Next launch with an mvp. And anybody know what an MVP is? It's not the most valuable player.

Minimum viable product.

Exactly. Minimum viable product. So the idea here is you don't launch when everything's perfect. You launch as soon as you're ready. So in my opinion, you really just need a good idea. You need some good people, and you need to put in a lot of hard work, and then you've got yourself a business. And then finally, be fearless. Find an opportunity and something that you're passionate about. And it's so cliche. Go big, go home. Just kind of trust your instincts and kind of go for it. Because I think we as a generation, I think we're the luckiest generation in history because we have the tools and ability to change the world. So all you have to do is start with a blank slit of paper, blank sheet of paper or some code or in my case, an Excel spreadsheet. Thank you. Please. So it seems like you would have.

Made a lot more money if you kept for example, the private stock illiquid and kept the information to yourself instead of creating public profiles. So was it a conscious decision to go down that route or very early.

On, did everybody hear the question? So very early on we decided is that we did not want to be a traditional Wall street company. So what Wall street does is Wall street controls all the information and basically acts as a principle and buys securities. And what they'll typically do is they'll buy it here from one client and they'll sell it here to another client. And the only way they can do that is they control the information. And so we decided very early on that we were going to be different. We were going to essentially provide as much transparency as possible. And, and instead of buying it here and selling it here, let's just kind of bring these two guys together and let them transact right here. And ultimately we figured we'll make it up in volume but really more importantly, we think it's going to just disrupt the old system because there's such a need for this type of thing. And through technology there is an opportunity to really kind of change the way that Wall street operates. Because look, Wall street is in serious need of disruption. I think in the back Columbia.

So with the loss of coverage for the sell side analysts and also the like you said, so much high frequency going, trading going on, do you actually think it's going to be a boon for fundamental investors who actually do their homework or due diligence and investing in those small companies? I know it's kind of not related to the way you're doing, but just.

What I've been reading is a lot of the traditional fundamental investors, the mutual funds and folks like that, they're just sick and tired of the public market. What's really interesting is a lot of the money now is being is flowing into these ETFs, these exchange traded funds. If you look at the S&P 500 from what I remember, all the stocks are moving with the highest correlation that's ever existed, which is they're all kind of moving together as there are a lot of different companies, but they're all moving together. So what we're hearing is that these fundamental long term investors are kind of sick and tired of the public market. The problem is they're not generally speaking, they're not yet ready to jump into the private market. And one, sometimes they just don't have the ability to do it, but they're really focused on liquidity. As much as we've created a whole new level of liquidity for these companies. It's not like a public stock. And so if you're a mutual fund where someone could pull money from your mutual fund every day, you just don't have the ability to invest in these types of companies yet. But what's exciting to see is that there's actually now funds getting created to buy private company stock and some of them are buying single names, some of them are buying multiple names. So there really are. It's kind of like the creation of an entirely new mutual fund industry where everybody knows what the game is. And the game is you're investing for, for the long haul and you're not going to have a lot of liquidity, but you're going to be able to invest in what are some of the hottest, the fastest growing companies that are out there.

So you talked about listing on second market and is that required because there's multiple layers of rights of first refusal that exist. And I'm just curious what listing actually involves. So that's one question. The second part is can you talk about how common and preferred gets priced differently in, in the second market?

So this concept of listing is actually a fairly new development for us. When we started and I showed you kind of the graphic of the volumes over the past three years, we would essentially trade the stock of any company where we had a willing buyer, willing seller, and the company really didn't tell us no. And what we've shifted to over the past three months as it's become, I mean the light bulb has gone off. There needs to be some type of new market. We've decided to start working with the companies directly. And so we actually have teams all around the country now in the world that are now working with the companies with that data. Number of buyers, number of sellers to decide when to open up their market. So listing for a market or for a company, it's free. All it really is is the company saying, okay, we are going to allow for some type of trading. These are the rules. Might happen once a year, might happen once. And it all has to happen on second market. So they're locking up all of the, keeping all the noise from happening, all kind of these one off things happening elsewhere. They're funneling it all directly through secondmarket in terms of the pricing or the difference in common. And Preferred. We've seen the venture capitalists, venture capitalists, they're funny. For an industry that loves to disrupt other industries, they hate getting disrupted. So when we show this idea or present this idea to them back in 09 or 08, and they were saying, no, no, no, you won't be successful. No need for it. Like six months later they said, well, you know what, maybe there's certain situations where this does make sense, where maybe we'll allow for some employees to sell. And then six months later they said, well, you know what, maybe there's actually some interesting investment opportunities here for us. And so we're going to start buying. And then six months later they said, you know what, this actually might be an interesting way for us to get liquidity ourselves. So we're now at the beginning stages of venture capitalists realizing that 10 years to IPO, that doesn't work, especially when their fund life is seven years. We have yet to see a lot of preferred stock getting sold. And ultimately for the companies that are trading on secondmarket, they're very, very mature, where the common, the preferred value, they've kind of met the same point. So the ones we have traded, there hasn't really been a big difference in the price between common and preferred. But I think over time, as we see more preferred stock trading, we'll probably just have to run two separate auctions, one for common, one for preferred.

You spoke a bit about companies controlling sort of the destiny in terms of when they would allow exchanges and stuff to happen. I'm wondering if that leaves too much in their control and that they could manipulate when they want to open up a trade. And I'm sure they would do it in great times and not in the middle of 08 or 09, for example.

It's an excellent question. And so we've talked a bit about this, which is giving the companies control is a great thing, but if they represent that they're going to do something and they don't do it, what exposure does the company have to their investors? And so far what's happened is when they tell their investors they're going to open up a market, the lawyers gave them very good language that says, and we intend to, or will use our best efforts to at some point in the future do this again. Now, I think we will get to the point in time where there actually is basically a schedule where you say we will open up our market twice a year, and these are the dates and companies will have to provide disclosure going into that auction of all material events. So if they're in the process of trying to do this or doing that and the board deems it material, they're going to have to make that information available to buyers and sellers. But at the end of the day, every company has major things happening all the time. And I can tell you that I would much rather have my stock traded once a quarter, twice a year versus every single day, every single millisecond, having my employees and investors focus on that price. There's a better way. There's got to be a better way.

So what type of information does the.

Companies give to the potential investors? And also, are there any second money market analysts or independent analysts or professional analysts cover these companies, which are actually larger than some publicly traded companies now? I guess so on the question of information disclosure, because depending who the seller is, there's certain information that has to be provided to buyers. And so if it's an insider manager, some type of affiliate board member, the basic information that has to be provided are things like audited financials and balance sheet, cap table and then risk factors. And companies are now choosing to do more than that. If it's not an insider that's selling, there's a lower level of requirement depending on how the stock is trading. But we essentially encourage and we will start requiring companies to provide at very least audited financials and a balance sheet. And in terms of the analysts, it's really interesting to see there's this ecosystem forming around this right now. And what we've seen over the past year, it's been awesome. There's probably five or six analyst firms. A few have actually just been created to do this that are now starting to write research on the private company market. A number of them that we've grown to be comfortable with, we then take them actually back to the company. When a company decides to open up its market, we also give them the option of getting analyst coverage. But instead of the company paying for the analyst coverage, we pay for it. So we take out a portion of our transaction fees and we pay for the analyst coverage and we allow the buyers to determine who gets paid. So it's an exchange funded model. So you remove the conflict from the public model where either a company pays or you have the investment bank doing the research. So with the credit crisis, I assume that the regulators ended up with some assets they didn't know what to do with. Did you get any weekend calls from FDIC or others as to what you could do to help them out? So in 08 and 09, we weren't nearly important enough to get that type of call. Okay, so the question is, during the midst of the credit crisis, did we get any late night calls from fdic, Fed, Treasury? We didn't get the phone calls, but we were down there and we were banging down doors and saying, hey, we've got this marketplace, let us help. And honestly, we didn't see any business out of it up until about a year ago. And the Treasury Department is now using Second Market and Deutsche bank and some other firms to sell off the TARP warrants. And so when they invested in these banks, they got warrants. Warrants are in liquid assets. And so whenever a bank buys back their or pays back their TARP money, we are helping in sell off those warrants. And what I can say is our relationships have certainly improved over time. Where last week or two weeks ago I was invited to a private breakfast with Secretary Geithner to talk about these issues. So hopefully next time we'll get the call.

You said that you were regulated by both the SEC and finra. Would you talk a little bit more about your experience in navigational navigating the regulation market in the US and then expanding that into Asia?

So on the regulatory front, it's pretty interesting to become a registered broker dealer, which is the kind of the FINRA designation of regulation. It's somewhat expensive, it's somewhat time consuming and you got to put a lot of policies and procedures in place. But dealing with the regulators, it's not nearly as bad as people make it seem. And I think we've had a unique experience because the regulators, again in my experience, they view us as the good guys. We don't create toxic assets, we don't buy these assets ourselves. We're not giving advice, we're not managing money and putting people in alternate securities. And so when the regulators come through, they come through probably once or twice a year for announced and unannounced visits. It's really been part an education process. We're educating them kind of what our business is. And then it has been them just going through. It's amazing. They review emails and all types of communications and, and they kind of put you through your paces. And then on the SEC front, we are an alternative trading system which we have to basically provide. I think it's probably monthly reports to the SEC on activity, but it's really not that difficult to be regulated other than expensive. And as far as Asia is concerned, what's interesting is Asia, it's not a country, it's like 12, 13 major economies so we actually have to navigate lots of different countries. And so we're one by one developing relationships with Hong Kong, Singapore, China, ultimately Japan as well. But we're still very early in that process. Will it be allowing for short selling and also equity derivatives in the market? So it's a question that we get. And so I think I see the value in having short sellers, I see the value in having derivatives. But this market is so nascent, and the last thing that we want to do is create an environment where we bring these casino traders into our market. We're really trying to keep them out. And again, short selling and derivatives, when used correctly, it's a healthy thing, it's a good thing. But I feel like we're so far away from being at the point where needed that I fear if we were to do that right now, it just becomes a speculation game. And that's what we're really trying to avoid with Second Market.

Former Equity research analyst actually out of Morgan Stanley. I'm at Jeffries and very glad to see this come around because I saw these changes happen while I was sitting at the desk and then afterwards as an entrepreneur. And what I wanted to ask you is what capability you've already got a good platform. What types of capabilities would you like to add that you don't currently have?

What would you want to do for.

Investors and for the companies that are.

Selling their stock that you're right now not doing well? On the regulatory front, there's a few changes that we're certainly supportive of that are being discussed right now. One rule that is going to prohibit our growth is when a company has more than 500 shareholders, they're forced to essentially go public. And that number was set arbitrarily in the 1960s, has not been updated since then. And what's crazy about it is when companies issue options to their employees, when those employees vest or leave, typically they exercise and they become owners. So if you have a very, very successful company that's issuing lots of options to employees, they're forced to go public because they're successful. And then on top of that, you have companies staying private twice as long as. So you have twice as many employees, twice as many shareholders. So we are certainly encouraged to see that. Last Friday, Chairwoman Shapiro said that the SEC is now open to increasing that 500 cap. So that's one, two is to be able to buy on second market, you have to be what's called an accredited investor. So an accredited investor is an individual or institution who has a million dollars in assets or makes $200,000 a year in income. The SEC has essentially said the only way to measure sophistication is your income or your net worth. I think that's crap, honestly. I think that there's plenty of people out there who have a lot of money who don't know anything about investing. And conversely, I know a lot of people who are very, very sophisticated, understand the markets, yet don't have a million dollars or don't make $200,000. So one of my pet projects, and I don't know if it will happen this year, but I would like to see there be an additional designation or a carve out where a test will be given, where anybody out there can take a test to prove their sophistication and you can take it through second market. We'd be happy to do it, happy to prepare the test materials for you. And you will basically recertify each year every two years to say you're a sophisticated investor. So I would like to see those two things happen that would also democratize.

The process because there's a lot of criticism that this is keeping the type of company that a public investor would want to trade in from ever getting to them and only keeping that among rich investors.

So a lot of the information for buyers and sellers on SecondMarket is essentially self reported. So I'm wondering if you've had any incidents of fraud or misrepresentation and how you've dealt with those types of incidents.

We have not seen that. It's something we're very focused on because as this grows, if this does become the next New York Stock Exchange, whatever it may be, eventually there will be fraud happens in the public market. Up until now, we've essentially required that the company will have done some type of institutional round venture capital private equity as kind of the first filter. Now, it's not to say that that a venture capitalist or private equity person could not have been taken for a ride. But for us we're relying upon a lot of the work that they've done. But over time I think there will become, call it listing standards that we'll put in place, whether it is having an audit done or some type of independent board representation. I'm not sure. We're kind of in the early stages trying to figure out what the best practices are for this, but so far it has certainly not happened. Any more questions? Quick question.

If you're actually using a test as a proxy instead of actual money tests, how do you check the risk tolerance of somebody who hasn't actually demonstrated their risk tolerance with real money on the market.

Great question, but maybe we can hire you to help us figure that out. I have a question.

Where do you see second market being in 10 years and what kind of steps are you taking, whether expanding it or keeping it a good market as it expands? Because you keep saying how you want to increase all these different regulations on the market and how do you keep that initial spirit of the market that you start off with as you expand?

So where are we going? So the first thing we're doing right now is we're expanding our private company market beyond just venture backed companies. So we'll have some announcements soon about some very, very major companies, some major asset managers who are now listing their stock on Second Market instead of going public. If you think about that universe, the venture backed industry, which we all know and love, it's tiny relative to the universe of private companies out there. Another area that we're starting to explore is creating markets for subsidiaries of larger companies. So you think about all the companies out there that have acquired startups and what happens is the employees of those companies, they lose any type of equity incentive. So sometimes they get shares in the parent company, oftentimes they don't. And I think there's just again, a Cisco flip type situation kind of highlights this, that there's. There's been so many failed acquisitions that startups are kind of less willing to get sold. And then the buyers themselves, they're trying to figure out a new way to do this. And so we've had discussions with most of the major buyers who said, look, if you can kind of crack this nut, we would like to put into place in our various subsidiaries some type of equity component and then something else that we're doing probably a year from now. So I talked about Second Market as your investment profile. We are intending to allow you to use that profile to sign up for or work with other platforms, other exchanges, other sites. So if it's a financial platform that requires you as an investor to have been vetted to basically be an accredited investor, we want to be your passport. So it's a Facebook connect for the financial services space to let you basically manage all of your alternative investing activity in one central hub.

Can you talk.

A little bit about barrier to entry for your business? Is it too late for someone to come in and try to do the same thing?

Well, definitely not. I mean, that's what I worry about most. Of course it's not Goldman Sachs, it's not nasdaq, it's going to be you leaving here and creating third market. But I feel like we've got a pretty good head start. Look, the barriers to entry for this business regulatory is a big one. That takes time, takes money. And the network effect, I think is very powerful. We can now put almost any asset up for sale on second market and get competitive bids. How do you compete with that? It's free to use second market. We get paid a transaction fee. So how do you create third market over here and do better than us? Because we're free and we've got this big buyer base. And then on top of that, I didn't highlight it during my prepared remarks, but we're very much a hybrid market where we do all the settlements. We deal with so much. Just, I mean, it's crazy what it takes to sometimes move a share of stock from a seller to a buyer. It's a lot of work, a lot of paperwork. And you really do, you do need a pretty big legal compliance team to be able to handle all of that. He's thinking he's in the back.

So you've talked about Goldman a couple of times.

What role do you see the larger investment banking firms playing, especially with regards.

To the Facebook investment vehicle and these kinds of things?

The investment banks, I think are. They're kind of conflicted because you have three different, four different kind of very important groups in the investment banks. You have wealth management, investment banking, equity trading, and then kind of the principal side of things. And they all want different things here. The investment bankers want to take companies public, they want to sell them. Wealth managers want to get their clients out of the stock to help them manage the money. The principal guys basically want to screw everybody else and control the information and buy and the equity capital markets. They'll trade anything. And so to date, their involvement has been. Let's use Goldman as an example. And all the major banks, they're buyers on second markets. And I'm talking about, broadly speaking, across all the asset classes, their wealth management channel are very good sources of referral business for us. The trading guys, they're trying to figure out how to get involved here, but haven't been able to figure it out. And I think over time, if they see money, they're going to go after it. We would love to figure out a way to tap into the expertise and the distribution that exists at the major banks. But I got to tell you, when I first started this company and we were out there in the first year, I took meetings with every single major bank because I Thought that they were going to be our key to success. I thought that they were going to be the most important buyers, sellers, partners. And after like a dozen meetings, it was like you want to blow your brains out. They can't think outside their box and they just don't innovate. So I think again, it's going to take there to be a very big revenue opportunity. That's I think why you saw kind of a Goldman Facebook type deal. But beyond that, you know, we're not really seeing a lot of that activity yet, but we will if there's a big opportunity. No one over here? Anybody have a question over here? No. There we go. So can you talk a bit about how you changed in your leadership style.

From the early days up to today?

Let's make that the last question.

So my leadership style I think was it was honed a little bit when I was an investment banker. So I was at Houlihant for five and a half years and I was like the associate that they would put on deals that were really hard and they would give me analysts that sucked. And so I was the one that would have to beat them to perform well. I don't know how I got that role, but that's a bad way to manage people. And it took a few years of kind of bottom up reviews. The senior people loved it because I get the analysts to work really hard and we'd be successful. But it took me some time to realize that ultimately the key to success for any business, it's the people. And I as a CEO, as a first time CEO, I'm learning every day. But early on I didn't value the importance of me being involved in a lot of the hiring decisions. I certainly didn't appreciate the fact that once we got to a certain point, maybe 100 employees, people just didn't know me anymore. It blew my mind that I started hearing that there were employees that were intimidated by me. I always thought that I was very approachable. So what I had to do was start having more town halls, start having more one on one conversations and really make myself available as a leader because I'm passionate, passionate about what we're doing. And everybody who has joined Second Market, they joined us because they want to change the world. And they see me speak on tv, they see presentations like this, but they've not had the exposure. So as a leader I've really had to. I got rid of my big fancy office. I now sit with everybody else and look, I'm still learning at 140 employees. We're growing very, very fast, and I'm going to have to continue adapting, but it's really been about hiring great people, having great lieutenants, and just being accessible.