(Adds Zynga representative's comment in eighth paragraph.)
Facebook Inc. and Zynga Game Network Inc. are charging fees of at least $2,500 for each sale of company shares, a move legal experts say discourages employees from putting equity in the hands of large numbers of outside owners before an initial public offering.
Zynga, the maker of the most popular games played on social-networking sites, began imposing a fee of $4,500 for each private share transaction in August, and raised it to $6,000 per sale in September, according to company e-mails obtained by Bloomberg News. Social networking leader Facebook has begun imposing a $2,500 fee, according to Greg Brogger, CEO of SharesPost Inc., which handles private-company stock sales.
Internet startups that have yet to sell shares publicly are trying to rein in the frequent online trading of employee stock, which can carry high administrative costs and can make it difficult for management to control ownership. Having more than 500 shareholders entails financial disclosures that some companies prefer to keep private until they pursue an IPO.
"The fee is being imposed for the administrative burden of providing the information that the seller by law is required to provide, and making sure the company is not screwing up its 500 shareholder count," said Ted Hollifield, a partner at Dorsey & Whitney LLP law firm in Palo Alto, California. He said he is not working on behalf of Facebook or Zynga.
Zynga's fees were discussed in a series of e-mail exchanges that included Zynga Deputy General Counsel Karyn Smith, an attorney for Zynga at Ropes & Gray LLP in San Francisco and a former employee who was attempting to sell shares.
Beginning Sept. 1 "the transfer agent fee is $6000 per transfer," Smith wrote in one e-mail. "This is our policy for all transfers."
In a different e-mail, Ropes & Gray referred to a "$4,500 transfer fee that Zynga is requiring on all trades and re- purchases.''
A Zynga representative said "Zynga charges a fee for the transfer of stock to cover some of the costs associated with arranging and overseeing sales of company stock."
A Ropes & Gray representative didn't immediately have a comment. Jonathan Thaw, a spokesman for Palo Alto-based Facebook, declined to comment.
Facebook stock trades at $5.84 to $6.82 on SharesPost, according to secondary market researcher NeXt Up. Zynga shares trade at $16.48 to $16.83. This month, Facebook said it held a stock split, granting five shares for each one held.
Zynga Chief Executive Officer Mark Pincus said in April that his company was considering limits on transactions, citing concern over leaks of inside information. Facebook has barred employees from selling shares until the company declares an open-trading period, a person familiar with the matter said in April. Executives at professional networking site LinkedIn Corp. were also said to be considering tighter controls at the time.
Some closely held companies attempt to keep the number of their shareholders low, since those with more than 500 are required by the U.S. Securities and Exchange Commission to disclose certain financial information.
SharesPost, based in Santa Monica, California, and New York based SecondMarket Holdings Inc. help owners of stock in closely held firms look online for buyers and negotiate the value of shares in private transactions.
Last month, LinkedIn stopped letting new buyers of its stock trade on SharesPost, according to Brogger.
Krista Canfield, a spokeswoman for Mountain View, California-based LinkedIn, declined to comment on SharesPost, though she said LinkedIn doesn't charge a transaction fee for the sale of its shares.
The average share sale on SecondMarket is for $2 million worth of shares, according to the company. For a transaction of that size, the seller would pay SecondMarket a fee of three percent and five percent, or $60,000 to $100,000. Legal opinions for such sales usually cost around $2,500, said SecondMarket spokesman Mark Murphy.
"The $6,000 fee sounds exorbitant if you're looking at purely administrative costs," said Hollifield. "If you're looking at it in the context of potential compliance with reporting obligations, then the $6,000 fee is actually reasonable."
With assistance from Ari Levy in San Francisco