Specialty firms are buying shares of the social-network company from insiders and repackaging them for sale to outsiders
Facebook's surging value is spurring shareholders of the company, which is not publicly traded, to sell some of their stock, giving investors from Silicon Valley to Wall Street a chance to share in the social network's fortunes. EB Exchange Funds, based in San Francisco, along with New York firms Felix Investments and GreenCrest Capital, have opened Facebook funds. "I don't necessarily know if it's a good investment," says Laurence Albukerk, founder of EB Exchange Funds. "I just know people want to invest, and we provide a means for them to do that."
Outsiders who want to buy into a private company can try a secondary exchange such as SecondMarket or SharesPost. There's no guarantee that the shares will be available, and companies generally have the right to block the sale by purchasing the shares themselves. Firms such as EB Exchange are potentially creating a new class of assets that would let investors tap fast-growing private companies like Twitter, Zynga, and LinkedIn. They buy shares in private companies from employees or company backers, placing the shares in limited-liability companies. Investors can then buy units in those companies. Felix Investments opened its first fund more than a year ago and now has funds for 14 companies, including Facebook, Twitter, Zynga, and LinkedIn.
Facebook, with a half-billion users, has more than tripled in value since March, to $40.7 billion, according to SharesPost, which looks at recent transactions and analysts' estimates. Zynga, the creator of online games such as FarmVille and FrontierVille, is valued at $5.4 billion, and social-networking service Twitter is at $3.4 billion. SharesPost values professional-networking site LinkedIn at $2 billion.
EB Exchange is buying as much as $15 million in Facebook shares for a limited-liability company, according to a Nov. 1 letter to prospective shareholders. The letter says that units in the LLC cost $10,000, with a minimum investment of $100,000. EB Exchange makes money by charging a 5 percent fee to enter the LLC—called Zoom Ventures—and another 5 percent when Facebook shares are distributed after an initial public offering or acquisition. An LLC can have no more than 99 participants, who must be what the Securities and Exchange Commission calls "accredited investors"—generally, companies or affluent individuals. While Albukerk confirms that he created the LLC, he declines to comment on whether it's investing in Facebook, citing regulatory restrictions that limit what he can say.
Boaz Rahav, an 18-year veteran of the financial industry, founded GreenCrest in New York earlier this year after talking to institutional investors who were having trouble investing in Facebook. He expects to raise at least $100 million for his Facebook fund. "There are quite a large number of institutions, large and small, that missed the boat or missed the opportunity to invest in Facebook," says Rahav. Both Albukerk and Rahav say they expect to open multiple company-specific LLCs.
For Facebook, the secondary market has made it easier for employees and investors to sell shares, easing pressure on the company to go public. Facebook is likely to put off its IPO until 2012, three people familiar with the matter said in July. Facebook spokesman Jonathan Thaw declined to comment.
Alex Bernstein, a San Francisco investor, bought a stake in EB Exchange's fund. While he says he's optimistic that Facebook's value will continue to rise, he recognizes the risk of investing in a security that will be difficult to sell until the company has an IPO. "It's an unproven path to liquidity," says Bernstein. "Secondary markets play a meaningful role for a period of time. We still need an IPO window to get liquid."
The bottom line: Investment firms are buying Facebook shares from insiders and repackaging them so outsiders can own a piece of the company.