Published On: Wed, Sep 24th, 2014

WSJ Blog by Deborah Gage: Startup Stock Exchange ready to take Startups Public in Curaçao

WillemstadWILLEMSTAD - Silicon Valley has the largest concentration of startups and investors in the world, but getting companies funded outside the valley—and especially outside the U.S.–can be challenging.

Enter the Startup Stock Exchange (SSX), an effort to enable small startups to raise needed funding by trading on a public exchange.

The two entrepreneurs who founded the company are aiming to solve problems like the ones they encountered while trying and failing to get funding for their startups in Costa Rica. Outside of the U.S., Chief Executive Ian Haet said, “there’s a limit to how many people can invest $25,000 and then wait around and wonder what’s going to happen” with an exit.

Based in Willemstad, Curacao, an island off the coast of Venezuela that’s part of the Kingdom of the Netherlands, SSX enables qualified startups to go public on the Dutch Caribbean Securities Exchange, where investors can invest and trade shares.

SSX uses the Dutch exchange as the legal framework for the trading, but all interactions by investors and companies are with SSX, which is a licensed listing adviser, broker and shareholder for the exchange.

The setup enables small companies outside the U.S. to raise small amounts of money—from about $300,000 to $3 million—on a regulated, transparent platform where both investors and companies are checked out by SSX, it says.

“This gets lost in news from Silicon Valley, but there are a lot of exciting and potentially lucrative companies from outside the U.S.,” said Mr. Haet, who grew up in the San Francisco Bay Area and lived in Palo Alto during the late 1990s dot-com boom. “By putting it into a public marketit’s much simpler for these investors to participate, and for a person in England to find good opportunities in Asiato find those Alibabas [for instance] before they come to New York.”

So far, seven companies are public, ranging from ComparaMejor.com, which lets users in Colombia compare and purchase auto and life insurance, to iNXTP B.V., a Latin American startup accelerator with a portfolio of more than 100 investments in startups. The first trading—in an Argentinian company that owns positions in about a dozen startups—begins shortly.

Mr. Haet and his co-founder, Chief Information Officer Brian Niessen, started SSX in 2011, bootstrapping the company while they built the technology and got the necessary licensing.

Since then, they’ve raised $1.25 million at a valuation of about $6 million from investors including Twitter Inc. and Square Inc. adviser Greg Kidd and InvertirOnline.com founder Facundo Garretón. Mr. Kidd was an angel investor in Twitter’s first round, Mr. Haet said.

Although SSX has programmers in Eastern Europe and business development in Latin America and Europe, the company is headquartered in Curacao because “it’s a clean jurisdiction,” Mr. Haet said, ruled by Dutch law and friendly with the U.S., without the problems of a country like Nicaragua or Colombia where investors might lack confidence.

Investors from more than 140 countries are participating in SSX, Mr. Haet said, although U.S. investors and companies are not permitted for now because SSX is not yet approved by the U.S. Securities and Exchange Commission as a registered broker-dealer.

Although any non-U.S. investor can apply to participate, they must be verified by SSX to make sure they’re not politically exposed, laundering money or engaged in other illegal behavior. SSX is supervised by the central bank of Curacao, he said, and as a result would be held responsible for any money laundering or terrorism financing.

“I can go to jail,” Mr. Haet said.

On the other side of its market, SSX has analyzed more than 700 companies from 86 countries, taking them through a multi-step due diligence that checks both the business and the team. The seven companies that were approved got IPO prospectuses, a 100 or so-page document that summarizes the risks for investors. Investors made pledges for shares until the IPOs were filled.

Shares are held by a third-party custodian that’s regulated by the central bank, and margin trading and short selling are not allowed. Companies are required to report monthly to make sure they’re doing what they said they’d be doing, Mr. Haet said. Ideally, companies that want to remain public could graduate to a larger exchange.

So far, SSX has leaned toward consumer-oriented businesses with tangible products that investors can understand, he said. SSX has approved a cosmetics company with five celebrity founders, for instance, and is talking to a brewery. It’s also considering real estate deals.

Although U.S.-based businesses such as SecondMarket Holdings Inc. and SharesPost met with regulatory difficulties and resistance from companies when they let investors trade in private company shares, Mr. Haet believes SSX can avoid these problems by trading shares in a regulated public exchange.

Also, although he thinks SSX could be a big disruption for venture capitalists, who “had control over the funding market for a very long time, and they were able to set the rules 100%,” SSX plans to raise venture capital itself next year, he said, perhaps $3 million to $4 million.

The new money would be used in part to move into the U.S. market.

Source: The Wall Street Journal

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