One of the concerns many investors and issuers have with private placements is the liquidity of investments and the ability to trade securities. We spoke with Solomon Tesfaye, Head of Business Development & Capital Markets at tZERO, to understand the firm’s private market solutions that enable issuers to offer tailored secondary trading for stakeholders.
Katipult: Hi, and welcome to Solomon Tesfaye for our Webinar chat about secondary trading of private securities and the impact this has on private markets.
Thank you for joining us, to get started, can you tell us a little bit about yourself and tZERO.
Solomon Tesfaye: Absolutely, and thanks to the Katipult team for having me. I’m Solomon Tesfaye, Head of Business Development and Capital Markets at tZERO, I am primarily focused on strategic partnerships and working with private companies and assets globally that are seeking capital raise and / or private market secondary trading solutions.
My background is primarily in investment banking, venture capital, operations and entrepreneurship.
Historically, we would describe tZERO as the New York Stock Exchange for the private markets. Ironically, in February of last year the New York Stock Exchange's parent company – Intercontinental Exchange (ICE) – made a significant strategic investment in tZERO. As a result of that investment, we were the beneficiary of a significant amount of executive level human capital from New York Stock Exchange and ICE including our new CEO, David Goone, who was previously the Chief Strategy Officer at ICE.
tZERO, through our broker-dealer subsidiaries, has now expanded the breadth of the firm’s services beyond continuous trading of private equity to offering managed secondary facilities supporting block trades, auctions and a wide range of other private secondary transaction types. Additionally, tZERO offers a range of capital formation solutions, tokenization, accreditation services via VerifyInvestor and other ancillary business services.
Katipult: Can we spend some time discussing the secondary trading of private securities, and can you provide some background and history?
Solomon Tesfaye: When we discuss secondary liquidity optionality with private companies, we review how the ownership was originally distributed, composition of the capital structure and transfer restrictions that may need to be amended. Regardless of whether clients previously sold equity via Reg CF–crowdfunding–up to $5 million dollar, Reg A+ offering amongst retail and accredited investors up to $75 million or a Reg 506c or 506b for accredited investors, there are predefined private placement regulatory frameworks that outline trading restrictions.
At tZERO we leverage our multiple broker-dealers and technology to automate these regulatory guard rails to ensure compliant private market secondary trading.
We can offer everything from more novel private market continuous secondary trading to block trade, request for quotes or auctions depending on a client’s strategic objectives and how they would like to manage mark to market valuation dynamics. Regardless of the secondary trading approach, there is a high degree of customization at the client’s disposal ranging from investor type that can participate, jurisdiction restrictions, minimum or maximum secondary transaction sizes, etc. This tailored secondary trading for the private markets is a significant contrast from options available in the public markets.
Katipult: So, from an investor perspective, how does secondary trading actually work on tZERO's platform?
Solomon Tesfaye: We engage directly with the management team of the specific private company or asset to ensure we align on what secondary market solution is appropriate for their stakeholders.
Oftentimes a client will come to us that already has a fractionalized ownership structure, and they are simply seeking to give investors and / or employees liquidity optionality. The company may be pursuing this for a number of reasons such as IR pressure from their older investors requesting liquidity, and management may not want to pursue an IPO, sell the company or use cash on the balance sheet to buy those investors’ positions.
First we will do business, legal and reputational due diligence on that potential client. We will see how they issued the equity or fixed income. And then, we'll make sure that it's conducive for secondary trading. For example, are there any transfer restrictions, first right of refusal, or other restrictive terms / covenants that need to be amended to allow for the transfer of these positions.
The private company will either allow a subset of their equity or all of their equity to trade. Stakeholders will establish a tZERO Securities brokerage account and deposit their ownership positions through an intuitive onboarding process.
Secondary trading introduces a flexible investment horizon for the investors on the ownership structure of a tZERO client. A private company’s investors do not need to take any action if they are not looking for liquidity.
tZERO Securities and the company’s management team will align on appropriate ongoing disclosure requirements, new investor awareness and access, minimum investment and go live trading date.
Katipult: We'll return to the democratization a little bit more as it's a theme we’ve seen running throughout a few discussions that we've had recently.
Regarding the advantages and uses of secondary trading, could you explain the main advantages for issuers and companies to enable secondary trading of their private securities.
Solomon Tesfaye: If an issuer is doing a new capital raise, you can potentially reduce the cost of capital with the introduction of secondary liquidity. For potential investors, introducing private market secondary trading to a traditionally illiquid investment opportunity can act as a catalyst for participation in a capital raise.
Private market secondary trading provides founders and management teams a greater degree of flexibility. Stakeholders can trade while founders and management teams can focus on continuing to grow the business rather than being pursuing a business transaction that may not be conducive for long-term growth of the company.
Asset managers enabling LPs to trade within a fund or across multiple funds within the firm are positioned to experience similar benefits from secondary trading. Enabling LPs to trade may be an elegant solution to replace or complement redemption programs, recycle capital by enabling one older LP in a fund to sell to a new LP so the previous LP can redeploy capital into a new fund within that same firm.
Also, this presents a great exposure opportunity as these companies and firms use these innovative secondary trading solutions to broaden access to alternative sources of capital.
Another exciting application of secondary trading is focused on human capital as companies look at secondary liquidity as an opportunity to enhance their employee benefit program and strengthen retention. IPO activity continues to decline and companies are requesting tailored secondary trading solutions specifically focused on giving their employees a degree of liquidity.
Katipult: Can you discuss any notable success stories for companies raising capital through tZERO and anything that really stands out?
Solomon Tesfaye: Our legacy business was purely secondary trading, and now I am excited to say we have experienced some early success with our new capital raise solution and have secured a robust set of companies seeking to partner with tZERO on their capital raise.
The most recently completed capital raise client is Aurox - a technology company focused on crypto software offering traders, investors and institutions a suite of tools that make DeFi more intuitive. Aurox wanted to provide a seamless investor workflow for their highly engaged community to have the opportunity to become owners of Aurox.
tZERO partnered with Aurox to launch their capital raise on the tZERO platform, which resulted in over 400 investors participating in the offering.
We are now engaged with a wide range of private companies within a variety of industry verticals including technology, media, funds, real estate and alternative investments.
Come back soon for part 2 of our conversation with Solomon Tesfaye from tZERO, when we’ll discuss some of the risks, challenges, and technology implications.
