High-Speed Trader GTS to Create Online Market for Pre-IPO Shares

ClearList venture to allow private companies to issue and sell shares, avoid cost of initial public offering

The Wall Street Journal, By Alex Osipovich, April 22, 2020

Canola plants in a greenhouse at Cibus, a biotech company in San Diego expected to use ClearList’s online marketplace.

Photo: Luis Garcia for The Wall Street Journal

One of the top electronic trading firms at the New York Stock Exchange plans to launch a new online marketplace where investors can buy and sell shares of private companies.

New York-based GTS is set to unveil the venture, called ClearList, later Wednesday. The first transactions on ClearList could come within a month, executives of GTS and ClearList said. The venture may appeal to investors hoping to get in early on the next Facebook Inc. or Zoom Video Communications Inc., at a time when companies have been waiting longer to hold initial public offerings.

“There’s been frustration among our clients at their lack of ability to participate in early-stage investments,” said Steve Quirk, an executive vice president at TD Ameritrade Holding Corp. and senior adviser to ClearList.

Other backers of ClearList include hedge-fund billionaire Paul Tudor Jones, whose firm, Tudor Investment Corp., is a minority investor in the venture.

To be sure, ClearList is far from the first effort to create an exchange-like marketplace for shares of companies that aren’t yet public. But GTS—the majority owner of ClearList—is betting it can build a more vibrant marketplace than existing private-shares trading platforms, by acting as the main dealer for shares on ClearList.

Like an exchange, ClearList plans to allow private companies to issue and sell shares in its marketplace, allowing them to raise capital while avoiding the cost and hassle of an IPO.

Among the first companies expecting to use ClearList is Cibus Global LLC, a biotech company that develops new, hardier strains of crops like canola and rice. Based in San Diego, Cibus filed for an IPO in 2018 but scrapped the plan after markets tumbled late that year. It is now looking at selling shares via ClearList, in part to allow employees to cash out their shares, said Cibus Chief Financial Officer Jonathan Wygant.

“We really want to access some of the value and to be able to trade, without some of the daunting issues of going public,” Mr. Wygant said.

The novel coronavirus pandemic has boosted private companies’ interest in ClearList as the economic downturn has forced many of them to raise cash, while volatile markets have made them hesitant to go public, said GTS Chief Executive Ari Rubenstein, who is also chairman of ClearList.

“Companies are skittish about doing IPOs, but they still have liquidity needs,” he said.

Awash in venture-capital and private-equity investment, private-company valuations have grown tremendously in the past decade. The aggregate value of U.S. “unicorns”—private companies valued at more than $1 billion—is now $715 billion, up from $53 billion in 2010, according to data provider PitchBook.

But even as investors have clamored for shares in such companies, trading them has remained a clunky process. Several firms including EquityZen, Forge and SharesPost run websites that match buyers and sellers of pre-IPO shares. They charge fees of up to 5% of the value of a transaction, far higher than the commissions for trading public stocks like Apple Inc. Due to the paperwork requirements of private-securities deals, it can take weeks for a trade agreed on such a website to result in the actual delivery of the shares.

There are also numerous brokerages that tout stakes in private companies directly to investors. A 2018 analysis by The Wall Street Journal found that an unusually large number of brokers at such firms had investor complaints, regulatory actions, criminal charges or other red flags on their records.

Cibus develops new, hardier strains of crops like canola, above.

Photo: Luis Garcia for The Wall Street Journal

The Securities and Exchange Commission is moving to relax the rules that prevent most individual investors from buying private securities. Under current regulations, such deals are typically limited to accredited investors—people who meet certain wealth criteria, like having a net worth of more than $1 million, excluding one’s home, or an annual income above $200,000.

Cibus filed for an IPO in 2018 but scrapped the plan after markets tumbled late that year. It is now looking at selling shares via ClearList.

Photo: Luis Garcia for The Wall Street Journal

Proponents of easing those rules, including SEC Chairman Jay Clayton, say individual investors should have greater access to early-stage companies. But investing in private companies can be risky because they are more opaque than companies listed on public exchanges.

GTS isn’t the only firm looking to revamp trading of pre-IPO shares. Carta, a California-based firm that provides software for startups to manage their capitalization tables, is also building a marketplace for private-company shares, expected to launch in the next 12 months.

A key difference between ClearList and its rivals is that GTS plans to continually buy and sell shares on ClearList, much like it does on the NYSE, where GTS is a designated market maker. Such firms oversee IPOs and help ensure orderly trading in stocks of NYSE-listed companies.

GTS’s trading will help ensure that ClearList’s users can always see prices for private-company shares, and buy or sell at those prices, because GTS will take the other side of the trade. On the websites that presently offer trading in pre-IPO shares, availability can be sporadic, with shares intermittently cropping up for sale as company insiders sell chunks of stock.

ClearList also plans to significantly undercut its rivals on fees. “All the platforms that are online today are fleecing investors,” Mr. Rubenstein said. “We’re going to blow that up.”

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