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Hawaii’s startup companies are “chronically and acutely hamstrung” by a lack of capital in the islands. And a local stock exchange would help fix that.

That’s what one member of the local investing community told the Hawaii Stock Exchange Working Group Wednesday.

But members of that working group — which lawmakers earlier this year — seemed more critical than receptive to the message. Members, including the state’s securities commissioner, questioned how a local stock exchange would free up capital for struggling companies. They didn’t get clear answers on direct economic benefits.

Honolulu investor and entrepreneur Rob Robinson held an informal Q-and-A session at the group’s .

Robinson is founder and president of the , an exclusive group of high-net-worth investors, which along with members of the Hawaii Venture Capital Association put out a in December in support of a local stock exchange.

“A way for startup companies to sell their stock directly to the public or to a qualified group of investors would be most welcome,” said Robinson, who also co-founded . “One of biggest drawbacks of investing is a lack of liquidity and the ability to extract yourself from that investment in any kind of timely fashion. A mechanism whereby they could sell to other investors through an exchange would allow more fatigued investors to leave the field and new ones to enter.”

$100 Million over 10 Years

He said he’s seen about $100 million worth of private investments made in Hawaii startups over the past decade. He feels that number could be much bigger if Hawaii had a stock exchange.

Robinson said a local exchange would be more comparable to an over-the-counter stock exchange versus something like the . He laid out two main functions of a local exchange:

• Allowing investors to offer their shares in companies for sale, and in turn making others aware that stock in those companies are available
• Allowing private companies to directly sell their equity to investors

“The inability to monetize your investments in private companies is a great disincentive for a lot of investors,” he said. “Once a company has an investor’s money … they can do what they want and not get punished by the market. Whereas if there’s constant feedback — a stock price — it encourages better governance, and also encourages them to be more professional.”

Why Hawaii?

Tung Chan, the state’s , questioned the advantages of establishing an exchange in Hawaii.

“If this was automated, what would the difference be between having this here in Hawaii versus anywhere else?” she asked.

“I think there is some benefit to having a local institution that knows the companies involved,” Robinson said. “While the trades may be automated, I would expect there would be some vetting and oversight of the companies when they apply to the exchange … And the exchange may attract companies that may want to relocate to Hawaii, which I think is a good thing.”

He also said it would be smart to initially limit investments to accredited investors based in Hawaii.

Working group member David Rair said a local stock exchange might “promote liquidity, but doesn’t make liquidity.”

Robinson disagreed, saying there’s no real way for investors to offer to sell their stock in local private companies, or for interested buyers to offer to buy other investors’ shares.

“I think it does create liquidity in a sense that it would allow the sale to occur,” Robinson said.

Tax Breaks for Trades

Chan and other members of the working group asked why the exchange, which would be a private entity, would need the state’s help.

“This would clearly be a private enterprise, so you could go ahead and do this right now,” Chan told Robinson.

He responded that the exchange would benefit from things like state tax incentives.

“If, say, the state decided every trade should be subject to (the General Excise Tax), that would be disastrous,” he said. “You can’t do these kinds of transactions, which need to be very fluid, with that type of friction.”

Lawmakers also seem to see a role for the state, in that the resolution forming the working group tasks the panel with making “recommendations for legislation to create the necessary regulatory framework for a local investment exchange including recommendations for the appropriate agency to exercise regulatory authority,” among other things.

Members of the working group formed by :

• Iris Ikeda Catalani, chair, commissioner for Financial Institutions at the state Department of Commerce and Consumer Affairs
• Richard Dole, vice chair, Dole Capital Investment Banking
• Tung Chan, Securities Commissioner, Department of Commerce and Consumer Affairs
• Brian Kern, Hawaii U.S. Federal Credit Union
• Dale Kobayashi, Morgan Stanley Smith Barney
• Virendra Nath, HDEP International, Friends of the Hawaii Local Exchange
• Neal Okabayashi, Hawaii Bankers Association, First Hawaiian Bank
• Mark Oyadomori, First Hawaiian Bank
• David Rair, Cades Schutte
• Gerald Sumida, Carlsmith Ball

The group is requested to submit a report of its findings and recommendations to the Legislature before the 2012 session starts in January.