The distinction between public and private companies has traditionally been stark. But in high technology, the difference between the two forms has begun to blur. Investors eager to buy shares of Facebook Inc. and other privately held social media companies have been able to do so through two relatively new online markets, New York-based SecondMarket Inc. and San Bruno, Calif.-based SharesPost Inc., instead of waiting for their initial public offerings.

The development of these private markets has been controversial. Private companies do not have to file financial information with the Securities and Exchange Commission (which began an investigation into trading in private-company stock in December). Some venture capitalists argue that trading in private-company shares benefits ex-employees, who are the primary sellers, at the expense of companies that now have to deal with outside investors and are at increased risk of being sued if the company's performance falls off. Other critics contend that the new online markets allow companies such as Facebook to defer an IPO that would otherwise have allowed individual investors of relatively modest means to invest in rapidly growing companies.

Though Facebook has played a large role in attracting attention to the trading in private company stock, other aspects of the development will be more important in the long run. David Weir, the CEO of SharesPost, says his site has seen trading in 35 to 40 companies this year, a number he hopes will grow to several hundred in the next five years. SharesPost is also positioning itself as a way for companies to raise late-stage venture capital, which would be a significant change for the Silicon Valley financial community.

Weir, 51, believes such a change is long overdue. He came to the Valley in the late '90s to run technology and telecommunications investment banking at J.P. Morgan & Co., where he had worked since 1982. In 2000, he became CEO at OffRoad Capital, a portfolio company of Menlo Park, Calif.-based venture capital firm Mayfield Fund that tried to develop an online private securities business. OffRoad was one of the casualties of the dot-com bust, after which Weir founded Spring Creek Advisory Group LLC, a boutique advisory firm focused on emerging-growth companies. Even though Weir returned to banking, his experience at OffRoad, he says, "made me feel like it was a space that was ripe for being transformed by technology."

Indeed, Weir believes his firm could be the one to fill the void left by the demise in the late '90s of the so-called Four Horsemen: Alex. Brown & Sons, Montgomery Securities, Hambrecht & Quist and Robertson Stephens. The four investment banks focused on advising rapidly growing tech companies, a role many market observers believe has been largely unfilled since each of the four sold out to larger financial institutions more than a decade ago.

The U.S. financial markets have seen major upheaval since then, a topic Weir explores in an interview with The Deal magazine's David Marcus at SharesPost headquarters in June.

The Deal magazine: What's changed in the intervening decade since you were at OffRoad?

David Weir: A couple of things. OffRoad was trying to develop these technology applications in an era of dial-up modems, and the technology has obviously come a long way since then. OffRoad was focused on early-stage venture investments, so when the Nasdaq declined 60% or 70%, the last thing that our 9,000 accredited investors were doing was looking for their next early-stage venture capital investment, so that contributed to the rapid demise of OffRoad. SharesPost, on the other hand, is focused on late-stage investments, and if you look at a wide array of regulatory and policy changes that have taken place over the last 10 years that had well-intended goals but some very unintended, perverse consequences, they created substantial change in the capital markets.

There's Sarbanes-Oxley, which made the cost of going public and the cost of being a public company much, much higher; decimalization, which took the margin out of the retail brokerage business; and Regulation FD, which changed the way that companies can share information. [And there was] the consolidation of the boutique investment banks, the Four Horsemen, which used to make a very good living taking companies public at an early stage. All of those changes have resulted in structural and permanent changes to the capital markets.

What are the effects of those changes?

The first thing is that the average time to exit has gone from about 4-1/2 years in the 1990s to more than 10 years. There were approximately 520 IPOs a year in the 1990s. Since then, the average has dropped to about 120 IPOs per year. As a result, companies are staying private much longer because the amount of venture capital flowing into venture-backed companies has continued to explode, so you have a lot of money coming into the funnel and not much money coming out. At the same time, you've seen a precipitous decline in the number of publicly listed companies. Both because fewer of them are going public and because there's been such a substantial amount of private equity buyout activity taking companies private, you end up with more than a 50% decline in the number of publicly listed companies.

What has resulted is that private-company shareholders need to get liquidity. If you're an angel investor or an employee who gets a four-year vesting stock option package, your ability to monetize the value of your shares now is extremely limited. You have venture and angel investors who are having trouble recycling their capital, which is making their returns worse, which makes it difficult for them to raise new funds.

Public company investors, who are dying to find really attractive dynamic growth companies, are not finding them in the public markets anymore, so they're trying to find a way to access these companies in a private state. SharesPost is positioning itself as the bridge between what is by all measures the most vibrant venture capital ecosystem in the world and the most liquid, deepest public capital markets in the world. There used to be a nice bridge, what I would call the private-to-public handoff, where venture investors would nurture a company until it got to a certain point: It became a couple-hundred-million-dollar company, it got taken public by H&Q or Robertson Stephens or Montgomery, and then there was an entire ecosystem in the public securities exchanges to be able to support companies that were emerging-growth companies at that stage.

Now, because of all the regulatory changes -- and I would throw in the Spitzer rules with the separation of investment banking and research -- Wall Street firms are not set up to be able either to provide research on companies that are, say, less than $1 billion in market capitalization or to trade the stock. We call the $100 million to $1 billion in valuation spot "capital markets no man's land" because companies there are not mature enough and they're not really viable public companies.

So you believe we're not going to see another iteration of the Four Horsemen?

I don't think we will see an iteration of the Four Horsemen in the same form that existed previously. I actually like to think that SharesPost is in many ways providing the same services to private-company shareholders and to private companies, providing shareholders with a liquidity mechanism and providing companies with a way to efficiently access low-cost growth capital.

The worry on the part of the VCs and senior managements of some private companies is that when their shares begin trading on SharesPost, they begin to lose a sense of who their expanded shareholder base is. How do you address that?

Those are very legitimate concerns. There are issues that companies have to manage relating to the number of their shareholders so that they don't end up inadvertently becoming a reporting company -- the 500-shareholder rule. Not surprisingly, companies want to know who their shareholders are. So we very early on created a set of company controls that we provide to companies that are interested in being able to set parameters around the transactions that are going on in their shares on our bulletin boards. The controls allow companies to be able to determine who can buy, who can sell, what percentage of their ownership they can sell, when they can sell.

We have a patent pending on these controls. We think that control feature is important to put in the hands of companies, that as they respect a shareholder's right to sell his stock, the shareholder also has to do it within the policies and procedures that the company wants to establish for the purchase and sale of its stock.

You talked about regulatory changes in the past decade that have affected this market. How much have structural changes in technology affected the number of companies going public, as opposed to changes in the financial and regulatory environment?

I'd go so far as to say that the changes were caused by policy and regulatory changes, and we're trying to use technology to address those challenges. The data is pretty clear if you look at not just the number of companies going public but also the size of the IPOs. If you look at the IPOs done during the 1990s, more than 80% of them were $50 million or less. If you look at the IPOs done since the bubble burst, less than 20% of them have been $50 million or less.

What you're seeing is companies not only waiting longer to go public, but when they do eventually go public, the size of the offerings is much, much larger, and they're being dominated by the big Wall Street firms, and it's very hard for the boutiques and the other supporting players to be able to make a living supporting these companies.

How do you address the critique that SharesPost and SecondMarket are allowing large sophisticated investors to dominate a market that historically public investors would have been able to participate in?

We're not the ones who make the determination about when or if to go public, and I would make the argument that we're democratizing the private-capital markets more than creating additional concentration. Prior to SharesPost, the only investors who had access to Facebook or Zynga or LinkedIn or Twitter or some of the most dynamic, most interesting growth companies in the world were 30 or 40 large institutional investors that every private-placement agent and venture capitalist worked with when it came time for their companies to issue stock.

We created a situation where we're bringing upwards of $1 trillion of capital that's held by wealthy individuals, by small and medium-sized funds, by family offices, into the private-capital formation process. There are obviously securities laws that restrict our marketplace only to investors that qualify as accredited, but within the constraints of those laws, I would argue that we've democratized access to private investments much more than has ever been the case in the past.

There's been an enormous amount of focus on the trading of Facebook shares on your website, but to what extent will your success as a company be determined by the 95%-plus of companies that aren't Facebook or Twitter and are going to be successful on a more modest scale?

I don't think we'd have a very interesting business for very long if it was just those companies because it's highly likely that those companies at some point are going to go public or get bought, and that would be the end of a niche market. We're building our business with the expectation that there are dozens and dozens of rapidly growing, dynamic growth companies that are coming in behind the big social media companies that also will be interesting for investors over time. In the fourth quarter of last year, we probably facilitated transactions in six, seven, eight companies. In the first five months of this year, we've facilitated transactions in 35 or 40 companies, and we expect that to continue.

Do you have any plans to expand your product offerings into debt or other kinds of securities?

We started our business around facilitating the sale of secondary shares. We now have 74,000 members, 22,000 accredited investors, and they've all come to us because they have an interest in private-company stock. The next leg of the stool for us is to facilitate primary capital raises for private companies. We're in the process now of raising our first primary raise for a company, and you'll see that become an increasingly large part of our business going forward.

How is this different from the traditional method of raising private capital for a Silicon Valley company?

In a number of ways, principally the front end, what I would call the demand-generation part of the process. This is typically the lengthiest part of the process, targeting investors that a company wants to raise capital from and then presenting the investment opportunity to them. In the past [that] has been driven by a set of static private-placement documents and putting a CEO and CFO on an airplane and having them fly all over the country visiting with investors trying to get them interested in the offering.

Using technology and some of the features that we've developed, we can create a way for a company to store all of their important investment documents in a private, secure, password-protected document repository to make that information available on a password-protected basis to investors who have an interest. We can do virtual road shows where the management team can present the opportunity to tens of thousands of investors in a secure, controlled, protected environment.

If a company decides they want to only target mutual fund companies or hedge funds or accredited individuals, we can do that. Technology allows you to shorten the time frame to close and to target specific kinds of investors in a much more granular way than you could in the offline world.

Silicon Valley is a place where personal relationships remain intensely important. The way you're trying to raise capital is a challenge to that very personal way of doing business.

Our target investor is not a venture capitalist. We're trying to find the companies when they've done a couple of rounds of venture financing, they've got two VCs on their board already. The value of adding yet another VC is not only low but potentially counterproductive. At that stage, the company's interest and focus is being able to access growth capital as quickly, cheaply and efficiently as possible, and we can use technology to help them do that.

We're not replacing that face-to-face interaction and that personal relationship that has to be present in order for an investor to feel comfortable investing in a company. When it gets to the point where someone has reviewed all of the financial information, the investment documentation, has had interactive communications with the company, has had all their due diligence questions answered and it's time to close the deal, that's when it's time for the management team to go and meet in person with the investor. It's when you're actually ready to buy, not at the front end of the process, and that takes the demand-generation process down from a three-month exercise to what could be a four- to six-week exercise, and the entire process could take a couple of months, as opposed to four to six months.

There is real value in getting the investor face to face with the CEO and CFO of the company, but we make sure that that is done only at the end of the process and only with people who have done the work necessary to be in a position to make an investment decision.

Where do you see SharesPost and this market going?

I think you'll see a substantial increase in the adoption of this marketplace by all kinds of market participants. Right now we're active in 30 to 40 names. Hopefully, a year from now, it's 80 to 100 names. Five years from now, hopefully it's several hundred names.

At some point, there's also the opportunity to broaden this out to nonventure-backed companies. There are tens of thousands of very large, interesting private companies that are outside of the venture capital world that are either owned by private equity firms or families, and those families need to have liquidity also, particularly as the demographics of family-owned companies are getting to the point with the baby boomers that those families are going to be looking for liquidity. Oftentimes, they don't want to sell the company, but they're looking for ways to gain some liquidity for estate-planning purposes and those kinds of things. We think we can provide a mechanism for those companies to find some liquidity for their shares.

At what point does your market become a scale game that you have to play not only here but also globally?

I think we're in the second inning of the development of SharesPost's model. There's no question that we can build a global business. What we're doing for accredited individuals, for family offices, for small and medium-sized funds, we can also do for international investors. Why not bring capital into the private-capital formation process in the U.S. from the Middle East, China, Europe or Latin America? Those investors have pools and pools of capital, they have access issues like many investors in the U.S., and if we can provide them with an efficient way to access these opportunities, it should be good for entrepreneurs, for private companies, to be able to access capital more cheaply, more efficiently.