Private Trades of Facebook Spur Questions About Transparency

Private Trades of Facebook Spur Questions About Transparency
Private trading that helped spur paper gains of 50 percent or more in companies such as Facebook Inc. and Twitter Inc. is raising questions about how much investors know about their financial condition. Photographer: Joe Raedle/Getty Images

Private trading that helped spur paper gains of 50 percent or more in companies such as Facebook Inc. and Twitter Inc. is raising questions about how much investors know about their financial condition.

Facebook, Twitter and other venture-backed Internet companies have seen their combined value rise 54 percent since June, according to a report this month by Nyppex LLC that focused on so-called secondary transactions that involve buying stock from existing shareholders. The Wall Street Journal and New York Times reported that the Securities and Exchange Commission is seeking information about transactions in Facebook, Twitter, Zynga Game Network Inc. and LinkedIn Corp.

While backers of venues such as New York-based SecondMarket Inc. that match buyers and sellers in private companies say they meet a demand where no public market exists, Frank Mazzola of Felix Investments says it makes sense regulators would want a clearer picture of trading. Dixon Doll, co-founder of the venture-capital firm DCM, says regulators may be studying how the venues affect rules related to how many people own companies that aren’t registered for trading.

“Any time when you have something that’s growing and dealing with private investors, scrutiny is a good thing,” said Mazzola, a partner at New York-based Felix Investments LLC, which arranges pools to invest in nonpublic companies. His firm’s rivals in that business include EB Exchange Funds LLC and GreenCrest Capital LLC.


The SEC sent letters to several participants in the buying and selling of the stock and the focus of the inquiry is unclear, according to the New York Times, which cited two people with direct knowledge of the matter who declined to be named because they weren’t authorized to speak about it. The probe is at a preliminary stage, according to the Wall Street Journal, which cited people familiar with the matter.

John Nester, an SEC spokesman, said that the agency routinely makes information requests to search for trading that might push the boundaries of securities law, but that any such correspondence would not be released publicly.

“We have not received any inquiry, formally or informally, from the SEC,” said Mark D. Murphy, a spokesman for SecondMarket. Allison Bedard wrote in an e-mail that SharesPost Inc., a SecondMarket rival, “does not comment on any specific confidential discussion with any third parties.” Bedard represents the company at Schwartz Communications Inc.

Jonathan Thaw, a spokesman for Facebook, Jenna Sampson of Twitter, Dani Dudeck of Zynga and Julie Inouye of LinkedIn declined to comment when reached by telephone.

‘Extremely Sophisticated’

Broker dealer SecondMarket and SharesPost in Santa Monica, California, help owners of stock in closely held firms look online for buyers and negotiate the value of shares in private transactions. Buyers on SecondMarket must meet regulatory requirements on financial backing before signing up for an online auction, monitored by exchange managers, where registered sellers have posted shares. On SharesPost, users connect with counterparties on a bulletin board.

“Most of the leaders from the buying side I’m aware of fall into the category of extremely sophisticated institutional investors,” said Doll, co-founder of the venture-capital firm DCM, which he says doesn’t own shares of Facebook, Twitter, Zynga or LinkedIn. “Obviously these companies are not public from the standpoint of having a daily freely traded market, but if you ask, are they public? Can people get liquid? It’d be hard for any smart investor to say no.”

500 Shareholders

By creating pools through which investors can buy the stock, companies such as Felix, EB and GreenCrest have helped Facebook keep its shareholder count at 499 or less, the maximum number a company can have before it has to disclose results to the public. The SEC requires companies with more than 500 shareholders to increase disclosures about their finances.

Facebook requires employees to hold shares until it declares an open-trading period, a person familiar with the matter said earlier this year. Facebook instituted the policy to better comply with insider-trading laws and to protect the interests of the company and its employees and shareholders, Thaw said.

“As far as I see, everyone is doing things in ways that are fully compliant with current SEC regulations,” Doll said. “I hope that the SEC will eventually recognize that the initiatives like this are good for everybody in the industry.”

SecondMarket is regulated by the SEC and Financial Industry Regulatory Authority, an industry group, Adam Oliveri, a SecondMarket managing director, said in April. The company doesn’t target employees for its trades, and would rather work with startups to help them better manage share trades, including addressing worries about insider trading.

“Based on what I read in the New York Times article, it wasn’t an investigation, it was an inquiry,” said Mazzola. “In a situation like this where there’s a market that’s evolving, they need to get their hands around it and make sure they’re comfortable with the way this market is transacting.”

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