By Dan Primack
November 1, 2011

New details on Groupon’s unlikely IPO partner.

Private stock exchange SecondMarket is selling shares in the upcoming Groupon IPO to its clients, according to Reuters.

The story says that a SecondMarket executive recently emailed “potential investors… who previously traded through the firm to see if they were interested in buying Groupon shares… SecondMarket will be working with Morgan Stanley, one of the top underwriters on the Groupon IPO, as a member of the selling group for the offering.”

SecondMarket isn’t commenting on the Reuters report, but here is what I’ve learned:

1. The Reuters story is 100% accurate.

2. SM will make money by receiving the “selling fee” on any IPO shares sold to its client. For example, imagine an IPO prices at $10 per share. Typically, the underwriters will actually buy those shares from the company at around $9.30 per share, and pocket the 70 cent differential (i.e. the “gross spread”). When a third party broker like SecondMarket becomes involved, however, part of the gross spread goes to the third party. So if Groupon priced at $10 per share, it’s likely that SecondMarket would get 10 cents per share sold with Morgan Stanley (MS) receiving 60 cents and Groupon getting $9.30.

3. SM doesn’t seem to have any plans to become an actual I-bank or M&A advisor, but this clearly is a toe in the water (i.e., never say never).

4. This is the first such deal SM has done. It will not do something similar with Zynga. Probably because Zynga asked SM to stop trading its shares more than a year ago, and SM has complied. The SM/Groupon relationship has been much more amenable over the years.

5. SecondMarket does not disclose the private trading values of companies until after they go public, but sources tell me that Groupon shares have traded both below and above the $11 billion or so at which Groupon currently is slated to price.

For the past year, I’ve wondered what will happen if a hot tech company goes public at a price below where it had traded on the private secondary markets. After all, those secondary trades are theoretically transacted at 15%+ discounts to public offering valuations, just as IPOs are theoretically priced below where shares will close on their first day of trading. Everyone knows that the latter doesn’t always play out, but so far the former has held court.

To me, SecondMarket’s Groupon strategy could be a brilliant hedge. Sure it might upset clients who bought higher than Groupon’s IPO price, but it could attract a larger universe of folks who either stayed away from Groupon because they felt the private price was too high, or who generally like the idea of being able to buy in at an IPO price. And, if this proves successful, I wouldn’t be surprised to see a repeat performance. Perhaps with Facebook…

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