The regulatory situation concerning private market networks appears relatively clear. Generally, the resulting transactions must qualify as “private placements” (so that purchasers are limited to institutions and affluent individuals) and must be conducted through registered broker–dealers. But because PMNs generally do not provide execution capabilities, they should escape regulation as “exchanges.” (That said, one recent development does show how the line between the public and private markets is blurring: The U.S. Securities and Exchange Commission recently approved the registration of Xpert Financial’s platform as an “alternative trading system.”) And although SEC is investigating certain transactions conducted through PMNs — notably, a well-publicized deal involving Facebook — its primary concerns appear to focus on the amount and quality of information available to secondary buyers when the company is not itself involved in the transaction.
Private market networks offer a powerful vision for a more effective, efficient global capital allocation system. The history of the Internet tells us that if they are left to develop on their own, PMNs will proliferate and help accomplish the transition from an industrial economy to an information economy. Perhaps the biggest risk to this optimistic scenario is that legislators and regulators will intervene and overreach in the name of “protecting” high-net-worth investors (as the original Dodd–Frank bill would have done in the U.S.) and “strengthening” existing institutions and processes by effectively limiting competition (as the final bill did). If government officials around the world allow this new global network to multiply the natural power of capitalism, if the requisite levels of transparency and trustworthiness are fostered in the design of these systems, and if business leaders and investors recognize the value of more direct interaction, then the new networks for allocating capital will rapidly take their place alongside more established exchanges — and could even begin to displace them.
Reprint No. 00062
- Bob Rice is a managing partner of Tangent Capital Partners, a registered broker–dealer, and the author of Three Moves Ahead: What Chess Can Teach You about Business (Even If You’ve Never Played) (Jossey-Bass, 2008) and the related website, www.threemovesahead.com.
- Disclosure: Tangent Capital Partners is the broker–dealer for transactions initiated through the AxialMarket platform (mentioned in the article), and the author serves on the board of directors of Angelsoft.net.