Have you heard about a Stock Exchange for startups and Small Businesses? Atleast, I had not heard about it till Ian Haet, founder of Startupstockexchange.net got in touch with me and introduced me to his website. Called SSX, it is a public stock market, similar to the NYSE, NASDAQ, BSE, NSE or any other stock exchange, but with procedures and cost structure specifically designed for startups and small businesses.
Needless to say I was quite curious to know what exactly SSX did and how it helped startups and small businesses to trade (raise funding against equity). And, I was more curious as to how it would help Indian startups.
We put across few questions to Ian Haet regarding SSX and replied us with some exhaustive answers.
1) How did this idea of SSX come about?
The two founders of SSX have started more than 10 companies in different locations around the world including Asia, Central America, Europe, Canada and the US. In each, the process of funding the company beyond the design or product launch was always time consuming, difficult and expensive (in commission and ownership).
We decided that there had to be a better process for funding a startup or small business. We looked at companies such as Kickstarter but determined that investors want equity and to earn a profit for their risk, that it is not sustainable for people to continue donating. We also looked at crowd funding but it’s a very convoluted process.
After listing every issue with raising funds we realized that the best solution would be a public and fully regulated stock market. Stock Markets have been in existence for hundreds of years. In their simplest form they bring companies with ideas and products together with investors who are looking to profit.
A stock market takes the best of all current models and lets the entire world participate. Some important points about stock markets that apply to raising funds:
- Investors can participate at any level. An angel or venture capitalist can purchase thousands of shares while a smaller investor could purchase $20 worth of stock.
- SSX opens up new investment opportunities for the global investor. Previously the individual investor only had the opportunity to invest once a company was listed on NYSE, NASDAQ or London Stock Exchange. At that point the majority the gains had already been achieved. For example Peter Thiel invested $500,000 in Facebook and on the opening day of trading his shares was worth $2 billion. The individual investor didn’t get a chance to invest until opening day. A $5,000 investment at $38/share on opening day was worth on June 14 $800 less.
- Information is public once the company goes public, but is private before hand.
2) How can it help Indian Startups?
The vast majority of entrepreneurs have great ideas and products but very few have connections for funding their company. They have very little ability to promote their company to investors outside of their local community.
I think the fact that Economic Times Power of an Idea contest received 16,000 submissions last year, for a 74 spots at a 9 day mentoring program and small cash grants, shows that there a lot of entrepreneurs seeking funding.
India has angel, seed and venture capitalists, but it is very hard to connect with them and if you do get funded, they can be very controlling in their investment terms.
The Startup Stock Exchange allows any entrepreneur in India to apply for listing on the Exchange and if accepted raise money from investors from around the globe.
3) How does SSX take care of legal and statutory requirements?
SSX will be a fully regulated and licensed stock exchange. We are negotiating with two different jurisdictions regarding the licensing and regulation. SSX will be governed by these regulations and laws as an Exchange.
The legal and corporate due diligence before a company can list on the Exchange will also ensure that Companies are properly constituted and have the authority to list on the Exchange.
SSX will further ensure that investors are verified so that they may purchase and sell stock on the Exchange.
4) How does money change hands (specifically incase of Indian startups)? Does it take place offline or online?
The minimum offering for a Company on the Exchange will be around $10,000 to $20,000 so they must have a bank account. If they can not open one in their home country, SSX can assist them with an account where SSX does business. Once a Company sells their shares they can receive the proceeds in their corporate bank accounts within 48 hours.
Before an individual investor you can purchase stock they must fund their account. This can be done in a number of ways. They can wire money from their bank account, send money via Western Union, purchase credit via credit card or by any other deposit process as detailed on the SSX website. For an investor to take money out of SSX after a sale or withdrawal they can request it via wire transfer or other secure and legal means.
SSX is working on a system of debit cards that are tied to trading accounts, but that is not ready yet.
5) What is the paperwork that is required from a startup to be part of SSX?
There is a five step application process for listing a Company on the Startup Stock Exchange.
Step one is account registration and receipt of a NDA from SSX. This is free.
Step two is completion of a company profile and an executive summary. This requires short answers to a few important questions such as the market opportunity, the product or idea, the revenue model, the competition and the company’s team. The SSX Advisory Team evaluates each executive summary submitted and issue recommendations and comments for continuing with the listing process. There is a $25 fee for this evaluation.
Step three is a detailed business plan. This includes full financials detailing actual and projected revenue and expenses. It also includes detailed plans for use of funds, marketing, revenue growth and user acquisition. The plan also details the founders, employees and advisors for the Company. The business plan will be reviewed by the SSX Advisory Team which includes industry experts and advisors in the same geographical region as the Company. The Team will offer revisions or clarifications and determine if the Company will be invited to complete a SSX Trading Application. A $250 fee is charged for review and advice on the business plan.
Step four is submittal of the SSX Trading Application includes the refined business plan and detailed corporate, legal and financial due diligence documents to ensure the Company’s corporate structure meets the requirements of the Exchange and that their shares may be offered to the investment public. The SSX Company Application team, including our legal advisors, will work with the Company to complete the necessary due diligence. There is a $2,500 fee for this due diligence work. The fee may be deferred until after trading commences.
Step five is review and approval by the Stock Market Commission.
Upon successful approval of all the steps and payment of a $2,500 listing fee, the Company will begin trading on the Exchange after a 5 to 15 day promotion and analysis period, where investors can analyze the information submitted during the application process and submit buy orders for the IPO.
6) What are the charges involved?
The cost for listing on the Exchange was established to match the budget of an early stage business. The fees are $25 for the executive summary, $250 for the business plan, and $2,500 for the trading application. When a Company starts trading on the Exchange there is a listing fee of $2,500 and then a monthly fee of $500.
These are small fees for the executive summary and the full business plan. This is for two reasons
- We have a team of advisors and professionals that review each submission and over suggestions and comments. So there is a value to that, even if you are not accepted to continue in the application.
- We want to make sure that people are committed to their ideas and not just submitting ideas that they came up with yesterday.
The more expensive fees for the legal, corporate and regulatory due diligence is only once the company’s business idea has passed the application process. This step will require time to prepare the company for trading on the Exchange and advice for corporate and legal setup. Since this step and the final listing fee is more costly we are willing to work with companies to defer the fee until the trading has started. This will allow them to pay the fee from money the receive from the sale of stock.
There are no other charges for a company. Some other services charge between 5% and 15% of the total money raised and take equity in the Company. Also it is important to understand that SSX does not charge the company anything each time their stock is bought or sold.
7) What is the current status of the Startup Stock Exchange?
SSS is currently working with two jurisdictions to complete the licensing and regulatory approvals to operate as a Stock Exchange. Once the licenses and regulatory approvals are complete, SSX will be a fully regulated electronic Stock Exchange.
While the permits are being completed we are allowing companies to start the application process since it takes between 30 to 60 days to complete. Our advisors will give feedback on the executive summary and the business plans. If the company is approved to continue, we will start the legal, corporate and regulatory due diligence.
The investors can register to start following the companies as they move forward in the application process.
I think the concept is really great and the best part is, it opens doors for investors to put money in startups across the globe.
If you are a startup and looking to raise funds, you should definitely try out Startup Stock Exchange. Here is an exclusive for Trak.in readers – Use Coupon Code “TRAK1” and you will be able to upload Executive Summary of your startup free of cost (worth USD 25).