According to the Wall Street Journal, the Securities and Exchange Commission is investigating the shares market of private companies, including Facebook and Twitter. The SEC is probing “potential conflicts of interest” since these companies are selling shares in secondary marketplaces.
Clients like SecondMarket and SharesPost are largely responsible for holding and selling these types of shares for prices that have little to stand on other than ballpark valuations.The conflict: The higher brokers at one of these organizations sells the private company stock for, the larger cut they get. In short, it’s advantageous to spin Twitter or Facebook’s valuations as larger than they may actually be. However, a spokesperson for SecondMarket told WSJ that all valuations are based on external sources and that share prices are only set after negotiations, and that this in turn creates “an objective marketplace.” But it all gets very murky when dealing with private companies and their extremely private financial information, and this is why the SEC is stepping in. The WSJ references that the commission is also looking into other private sector share vendors, but did not list any other specifically.
The commission already regulates SecondMarket, including its individual brokers and investors as well as specific sales. However, SharesPost doesn’t fall under the SEC’s scrutiny – yet. If unstoppable forces like Facebook and Twitter want to continue to build their stock market portfolio and operate as private companies, they will likely have to put up with oversight from the commission into all of the trading platforms they use. Private stock exchange is a gray area that the SEC can’t quite control, but when private companies are making millions of dollars in fundraising rounds, it draws some attention. Facebook recently had to limit its share sales to consumers outside the US only when its deal with Goldman Sachs drew unforeseen interest from the SEC.
Facebook and Goldman Sachs may have escaped a full-fledged investigation in that particular deal, but the SEC isn’t backing down, and the matter may have been the trigger toward establishing a much more transparent private market. Hey, if nothing else, maybe this will inspire more of those IPO filings to start pouring in.
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