Nasdaq Gives High Rollers a Market Free of Regulation

By David Cho, Washington Post
Originally Published on August 14, 2007

Nasdaq is set to launch tomorrow what its executives are calling one of the most significant developments on Wall Street in decades -- a private stock market for super-wealthy investors.

Minimum requirement for traders: $100 million in assets.

Any private firm can list on Nasdaq's new platform, which is called the Portal Market, and raise money by selling stock to an elite group of shareholders. These companies would remain private and not have to make public their financial statements or submit to federal regulation, such as the Sarbanes-Oxley corporate accountability law.

Once a tiny influence on the markets, private money has gained unprecedented power on Wall Street. This year, the biggest deals have been swung not by public companies, but by private-equity firms that are spending hundreds of billions of dollars to buy household names, such as Hilton Hotels, Sallie Mae and Chrysler, and turn them into private companies.

For the first time last year, corporate America raised more money -- $162 billion -- from private investors than from initial public offerings, which raised $154 billion from the three major U.S. stock markets -- Nasdaq, the New York Stock Exchange and the American Stock Exchange.

The boom in private money has become so important to the financial system that major investment banks, including Goldman Sachs, Merrill Lynch, Lehman Brothers and Citigroup are setting up rival private stock markets of their own. But none will be as large as Portal, which will list the shares of about 500 firms on its first day of trading.

Ordinary investors can only participate indirectly if their mutual fund creates an account to trade on the private markets.

These markets are creating an alternative and exclusive investment world buffeted from the turmoil that has roiled the major stock indicators in recent weeks. In the public markets, investors dumped stock during a credit crisis caused by the deteriorating mortgage industry. Private-market traders generally are sophisticated financial groups that take a long-term view of their investments.

"One of the problems that business faces in America today is what I would call 'short-termism,' " said Howard S. Marks, chairman of Oaktree Capital, an investment firm that was the first to list on the private market developed by Goldman Sachs called GSTrUE. "There's a lot of expense and complication associated with being a public company today. . . . Now it is possible to gain most of the advantages of being public while sidestepping the disadvantages."

The private market, Marks said, shields companies from regulation and from wild swings in their share prices that are caused by a temporary drop in earnings or a bad rumor.

In just a few years, Nasdaq officials predict, stock offerings on private markets will far exceed IPOs on public exchanges.

"It's a transformational development in the capital markets," John Jacobs, executive vice president of Nasdaq, said of Portal's arrival.

The rise of private money has created a new class of powerbrokers on Wall Street who have enriched themselves even as they have provided billions of investment dollars to companies in all kinds of industries. But the trend is causing a backlash among working-class Americans who generally are shut out from investing directly in those circles, said Colin Blaydon, director of the Center for Private Equity and Entrepreneurship.

"While there has been great value creation in the American economy, it has not gone to the large bulk of American citizens," Blaydon said. "It has gone to the very top slice -- and I mean the very top slice -- with no increase of real incomes of American workers, including the middle-class management class. And that is something that people sense in their guts. They know they are not better off, and yet there are a handful of people who are extraordinarily better off."

Portal is the first centralized private stock market for an elite class of investors called Qualified Institutional Buyers, or "QIBs," that was created in 1990 by securities rule 144A. This law defined QIBs as investing institutions with at least $100 million in assets. It also allowed private companies to raise money by selling shares only to QIBs and remain exempt from regulatory scrutiny. These firms, however, disclose their financial statements to their investors.

Since they began, QIBs have only been able to trade in the old-fashioned way: calling each other over the phone and negotiating a price. They had no way to trade shares on an exchange. No electronic system existed that could give them instant updates on the price of a firm's stock or the number of shares traded each day.

Now, with Portal and other private markets, these investors can log onto a secure Web site and get a wealth of data on a company's stock. They can trade shares by clicking a few buttons. Stock prices are updated automatically.

Analysts say the new ease-of-use is another incentive for super-wealthy investing groups to shun the public markets and focus on making money in the private sphere.

Going private is also becoming increasingly attractive to public companies that must spend large sums to comply with complex accounting regulations that are part of Sarbanes-Oxley.

"There's definitely a growing desire to get away from the public markets," Blaydon said.

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