We’re not sure what exactly prompted the SEC toward investigating secondary markets, which allow private companies like Facebook and Twitter to buy and sell shares without revealing any significant financial information. It might have been that the rapid growth of sites like SecondMarket and SharesPost are making it easy for early shareholders to unload stock at a time when Facebook valuation is $50 billion one month and $84 billion the next. It might also have dawned on the SEC that it’s not in the middleman’s interest to keep the stock at a fair value. Or perhaps the SEC realized that there’s a multibillion market for companies that might soon be unleashed on the public operating with little to no government oversight. After launching a probe into the issue in late 2010, the Goldman Sachs-Facebook deal convinced the agency to investigate those conflicts of interest more closely. After all, The Wall Street Journal reports, they don’t want another Michael Milken on their hands — at least not while they’re dealing with a Bernie Madoff and Dick Fuld:
“This marketplace is like the early days of the ‘junk’-bond market, where companies are finding creative avenues to raise capital,” said Lou Kerner, a social-media analyst at Wedbush Securities Inc. The junk-bond market allowed start-up firms with thin track records to tap the capital markets, but it encountered growing pains that included scandals in the late 1990s.
The SEC’s investigation will look at whether the firms promoting stock-trading need to be registered as broker-dealer operations, which would subject them to oversight and inspection from both the Financial Industry Regulatory Authority and the SEC. SecondMarket is licensed. SharesPost, which just gave Facebook that $84 billion valuation, isn’t. Both companies, which make money off the transaction fees, claim to be agnostic in their assessment of a stock’s value with safeguards for investors who do their own due diligence. The SEC will also be looking into rewriting financial disclosure rules for private companies. (Goldman tried to get around the rule that says more than 500 shareholders and you have to open up your financial books by having hundreds of its clients invest as one. That is until it yanked the deal from U.S. investors.)
Before tech enthusiasts get up in arms about the SEC poking its nose in private markets where it doesn’t belong or ruining everyone’s chances of getting way rich(er), let’s remember who we’re talking about here: the same agency that hasn’t managed to send a single Wall Street executive to jail had a hard time wringing paltry settlements from Wall Street firms for infecting the world’s markets with a global financial contagion. But early employees and investors that want to cash out far from the SEC’s prying eyes might want to get a move on.
Private-Share Trade Is Probed [WSJ]
Related: With Facebook Deal, Goldman Sachs Now Able to Get Clients to ‘Shaft Themselves’
Botched Facebook Deal Makes Everybody Hate Goldman
