US SECURITIES regulators are looking at how investors trade shares in four privately held companies – Facebook, Twitter, Zynga and LinkedIn – according to reports.
The inquiry may broaden to the exchanges and trading platforms that facilitate these transactions, experts said.
The two main online trading platforms for private company shares, SecondMarket and SharesPost, have been growing fast.
SecondMarket has closed on about $400 million (€300 million) of private company deals in 2010, up from $100 million the previous year. So far SharesPost has signed up about 39,000 registered members.
That fast growth could attract regulators who are concerned about whether these markets can be manipulated by insiders, said Robin Bergen, a partner at Cleary Gottlieb Steen Hamilton.
The US Securities and Exchange Commission could also look at the fees these companies are charging for linking up buyers and sellers, and how the trading sites ensure that buyers are eligible to purchase securities from private companies, said Alan Berkeley, a partner and securities regulatory lawyer at KL Gates.
These companies “will be intensely scrutinised and will be the subject of SEC regulation before very long”, Mr Berkeley said.
The SEC may have an easier time with scrutinising SecondMarket, because the trading platform is already registered with the SEC as a broker-dealer. “That would be a clear hook for the SEC,” Mr Bergen said.
Registration means that SecondMarket is subject to disclosure requirements and oversight by the SEC and the Financial Industry Regulatory Authority.
A report in the New York Timessaid the SEC has asked for information from parties involved in buying and selling the stock in Facebook, Twitter, Zynga and LinkedIn.
An SEC spokesman declined to comment.
SecondMarket is a broker dealer and says it is fully compliant with all rules and regulations, while SharesPost – which is just an automated platform with a third party bank and escrow agent – is not required to be compliant.
“We welcome whatever examination that the SEC may undertake here,” SharesPost chief executive David Weir said, adding that his company has been talking to regulators since before its launch.
Every transaction that SecondMarket conducts is scrutinised by the SEC, said Mark Murphy, a company spokesman. The SEC has not approached his company for information, Mr Murphy said.
SecondMarket and SharesPost began linking buyers and sellers of private company shares in 2009. They allow employees of these companies to cash out of their shares, or venture capital firms to make an exit.
To be a buyer of stock on either platform, the investor must meet SEC requirements, including having sufficient net worth.
The SEC may look into whether SecondMarket and SharesPost are securities exchanges under the 1934 Act, which would require them to be regulated in the same way as the New York Stock Exchange.
These platforms may in some ways be accelerating the level of transparency in the secondary market trading of private companies, as each transaction is recorded and documented, said Adam Oliveri, head of private company market at SecondMarket.
