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Too good to be TrUE?


Michael Fischer is a freelance journalist based in the US.

A problem for many companies is how to raise liquidity and yet remain private. Michael Fischer discovers that one firm may have found the answer – a little known electronic market that US businesses are keen to join and competitors are desperate to copy

In an ideal world, a family business needing to raise capital could dip into the deep pockets of investors off the radar of regulators, thus avoiding the need to open its books to the public. A mechanism for nonpublic US companies to issue shares on the private market exists under the US Securities and Exchange Commission's (SEC) 1990 144A rule, but this is a complicated process, and if not done correctly can trigger the registration requirement.

Now, Goldman Sachs has come up with an elegant way for companies to generate liquidity without going public. In May, the investment bank rolled out its GS TrUE (Tradable Unregistered Equity) electronic market, listing 15% of the shares of Oaktree Capital Management LLC, a Los Angeles alternative investment firm. The listing raised $880 million from some 50 investors. Impressively, the offering did not trade at a discount, despite the private market's limited breadth and liquidity. Priced at $44 a unit, the shares traded at $50 in the aftermarket, according to reports.

But the beauty of this electronic market lies in what Oaktree avoided by listing its shares on GS TrUE. It did not have to register its newly issued securities with the SEC, thus avoiding strict disclosure requirements, which might spark interest among activist investors. Nor does it have to comply with the complexities of the Sarbanes-Oxley law on corporate governance, often a big financial burden for companies.

However, Oaktree does not get out of opening its books altogether. According to GS TrUE rules, the company has to issue quarterly, annual and event-related financial reports, but only to investors. This is a potentially big advantage for any company that may have competitive reasons not to have such information published. Indeed, Oaktree said in a memorandum that by staying private, it avoided "pressure to describe the company as one capable of steady growth, whereas our underlying business is actually quite variable".

Another advantage of GS TrUE is that an issuing company sells its shares to a limited number of qualified institutions with more than $100 million in assets. Because the companies being traded are private, Goldman Sachs restricts ownership to institutions that are not considered in need of the regulatory protections extended to private investors. Hence, the money a company brings in on this market is both sophisticated and stickier than what it could raise on the public markets.

The 144A rule allows private companies to issue shares to a maximum of 499 institutional investors without having to register the securities. Goldman's innovation is to electronically monitor investors in a company to ensure the number does not exceed 499 and trigger the registration requirement.

Goldman's competitors are busy developing private electronic markets. "Basically, every single bank is working on its own version of GS TrUE right now," said Roger Ehrenberg, the former president and chief executive of DB Advisors LLC, Deutsche Bank's fund of funds.

The Nasdaq exchange is perhaps closest to bringing a trading platform for private placements online. It expects to receive regulatory approval later this year for Portal, its version of an unregistered trading facility for smaller companies. The exchange's ambition is to become a central trading market for 144A securities. Nasdaq's executive vice president, John Jacobs, has suggested that even private investors might be able to invest in 144A securities through a mutual fund, if the fund had $100 million in assets to participate. He envisaged a fund company proposing an exchange-traded fund based on the Portal index to the SEC.

So far, few outside the financial services sector, and only a handful of journalists, are aware of GS TrUE. But as more firms step up to compete with Goldman Sachs, family businesses that aren't ready to enter the public market would be advised to investigate this innovative way of raising capital.

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