Facebook Trades Catalyze SEC Review of Secondary Markets

The increasing interest in secondary markets for shares of closely held companies has prompted the SEC to take a closer look at these practices. Market makers such as SecondMarket and Sharespost do eBay-like auctions for purchases of shares from these companies, either from investors or, often, from employees. The secondary markets provide a way for employees to get some liquidity for equity awards they have exercised or been granted, although some companies restrict or prohibit sales on the grounds they want people to retain an equity interest. Companies that have assets of more than $10 million also want to be sure they do not end up with 500 or more shareholders and become de facto public companies. The market-makers typically charge a very high transaction fee, such as two to four percent, for each transaction.

The secondary markets raise a number of issues, including how potential investors can really know enough about what they are buying because so little information is public. With the recent Goldman Sachs creation of a special purpose vehicle to invest in Facebook, the 500-shareholder issue has also become more important because the vehicle only counts as a single investor even though the investment entity has multiple investors.

The SEC has not indicated what might come out of the regulatory inquiry. A good article from CNNMoney and Fortune can be found at this link.