SEC Examines Secondary Market Trading

A healthy trading market has emerged around the shares of some well-known private social networking companies--Facebook, Twitter, LinkedIn (which has since filed for an IPO) and Zynga, the creator of online games such as FarmVille. This secondary market is allowing investors to easily trade the shares of private companies, a development that has provided a simple funding and investing opportunity for private companies and their would-be investors.

It's also gained the scrutiny of the Securities and Exchange Commission (SEC). In December 2010, the New York Times reported the SEC had sent information requests to unnamed participants in the secondary market for trading shares of the four aforementioned social networking companies. The commission also is taking a look at the exchanges themselves, which act as neutral links between buyers and sellers. It has remained silent on the investigations, but observers speculate that a main point of focus for the agency may be Section 12(g)(1) of the Exchange Act, which imposes the reporting requirements of a public company on companies with more than 500 shareholders of record.

Missing Link

Private equity exchanges have become prominent over the past two years, allowing easy trades of private stock that previously was largely illiquid.

Growing Uncertainty

Clark describes the exchanges as similar to e-bulletin boards: They bring together buyers and sellers, provide a common set of neutral contracts and arrange for banks to escrow cash. They don't actually process the trades in the way a typical exchange would, and they don't make money on the actual transaction.

The uncertainty would have affected the SPV Goldman Sachs created to sell shares in Facebook--reportedly, hundreds of investors were interested. Goldman Sachs bypassed the issue by announcing it would only offer the shares overseas, a decision that came after the SEC's inquiries became public knowledge. Goldman said it made the decision following the rampant media coverage of its creation of the Facebook SPV, which the SEC could view as solicitation.

It wouldn't be surprising, however, if another issue at play in Goldman's decision was uncertainty over the 500-shareholder limit in the face of the announced SPV.

Associate Editor

Melissa Maleske

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