Daylife/Reuters Pictures used by permission

John Doerr, venture capitalist, and Facebook founder Mark Zuckerberg

A red-hot trading market has developed in the shares of the world’s leading social networking companies: Facebook, Twitter, Zynga and LinkedIn. What is unusual is that none of the companies are listed on a public stock exchange. Each is privately held.

Now, the Securities and Exchange Commission wants to learn more about the business of these stock trades. The agency has sent information requests to several participants in the buying and selling of stock in these four companies, according to two people with direct knowledge of the inquiry who requested anonymity because they were not authorized to speak about it.

It is unclear exactly what has piqued the agency’s interest. An S.E.C. spokesman declined to comment on the matter. But the S.E.C.’s interest comes as a crop of new exchanges is popping up to facilitate these trades…

Who is selling these shares? Much of the supply comes from former employees at these companies and their early stage venture capital investors looking to exit their stakes.

The buyers in these so-called secondary trading markets are mostly wealthy speculators looking to snag a piece of the next Apple, Microsoft or Google before the rest of the investing public can

It is uncertain what exactly the S.E.C. is looking into, but several securities lawyers say it could relate to understanding the number of shareholders at these companies.

That would be relevant to regulators because Facebook and other start-ups have a reason to keep the number of shareholders to under 499. If they had 500 shareholders, S.E.C. rules would require them to disclose their financial results to the public…

The only surprise is that the SEC is actually getting off their rusty dusty and doing some investigating. Not that it guarantees any response if they discovered illicit activities.

  1. bobbo, just follow the money says:

    It is always the money, even if it involves something else, its always the money.

    But this does remain interesting: “Who is selling these shares? Much of the supply comes from former employees at these companies and their early stage venture capital investors looking to exit their stakes.” /// Traditionally, the “pay off” comes at the IPO–thats when everyone gets filthy rich and the company goes into the tank screwing everyone. There is of course nothing but game playing at the pre-IPO stage because that sets how much you will get paid.

    On a completely blank slate, I’ll guess someone is angry they are being “forced” in some way to give up their positions to someone more favored. It might not even be illegal, just time based options coming to an end and management deciding in large part not to go public in order to screw this one group over in favor of group number two.

    There is all kinds of “regulation/enforcement” that is missing in the pre-IPO area of financial shenanigans. No one know how much of our vaunted “Capitalistic system” is simple fraud that fleeces 99% of the public in favor of the top Super Rich.

    Corrupt from Top to Botton. Yea, Verily.

  2. foobar says:

    Maybe the SEC should start scrutinizing OTC derivatives trading within listed companies. How much money is involved there? Oh right, $60 trillion. How much have average US citizens been screwed out of in last two years from this activity? Oh right, $4 trillion.

    It makes more sense to go after angels and vc’s. That’ll straighten out the US economy.

    BTW, this activity is up because baby boomers are trying to hit home runs on a single pitch since they’ve borrowed their way to retirement and still have to pay for it.

  3. Yankinwaoz says:

    I wonder how much Sarbanes-Oxley has to do with this? By keeping the trading out of the public exchanges, the companies do not have to comply with SOX. Perhaps they neat sidestep of SOX rules is what is really ticking off the SEC?

  4. MikeN says:

    The government is always looking to ways to expand its reach, just as with the FCC trying to regulate the internet.

  5. foobar says:

    #4 The FCC seriously blows goats on that. A government’s main job is to clear away obstacles for citizens, not build them.

  6. Awake says:

    The exchanges make a few pennies on each transaction… cut them out and they lose billions.

    But I am actually in favor of the existing trade system. The last thing we need is more deregulation of the financial system. Start allowing ‘open trading’ and pretty soon we will have a scam artist heaven like eBay.

  7. MikeN says:

    A system that is regulated so that people do not take advantage of knowledge not available to others, yet only works because people take advantage of knowledge not available to others.

  8. chris says:

    #2 I think interest rate swaps are the most likely source for the next Really Bad Thing. According to Wikpedia the size of the market for these things is over $300 trillion.

    I’m not going to explain what they are, because nobody cares.* I can tell you that these have no sensible purpose. At least none so compelling that almost a decade of gross world product should be tied up in it.

    For everyone:

    I was reading Griftopia, by Matt Taibbi, on the train to work today. He said that when investment banks moved into the commodities futures markets, the most obviously useful type of derivatives, that the market increased in dollar size by a factor of ten. That ended up causing the 2007-2008 commodities bubble, which happened to puncture the larger credit bubble. Great book!

    I think Taibbi has the best diagnosis of the problem. You can also read him in Rolling Stone.

    * if you are interested in interest rate swaps, wikipedia is happy to tell you more at:

  9. dittmv says:

    Wow, talk about big government…

    The SEC misses the big one and now they are poking around in PRIVATE transactions!!? How does that work? Where does this end?

    Is the SEC going investigate when the flower shop on one corner buys the rival on the other corner, or baseball card sales, or art sales, or non-dealer car sales? Is the SEC busy barking up every other tree, to distract the public from a real scam?

    Hmm, why do these private transactions happen?
    Oh that is right…

    1) Sarbanes-Oxley effectively made it illegal to come to market unless of course your mission is to rip off the public.

    2) Some companies augment compensation in stock and the employee for personal reasons wishes to convert their relatively inconvertible wealth in shares to dollars rather than behave as a fool and believe that their Netscape stock will recover after tanking from a high of 174.50 to single digits.

    3) There is a considerable amount of crap on Wall Street. Buying something new that lacks baggage may be less risky than the prevailing notion of conservative investing.

    Ahh, but my explanation is not good enough for the SEC.

    I cannot wait until the SEC passes legislation** that mandates that before all investment transactions can be completed a questionnaire must be completed. The questionnaire would be marketed as a way of ensuring public fairness in all transactions and it could prevent people from making hasty decisions. Market participants would be required to explain and supply evidence to the government why they are purchasing a particular instrument, except the big guys because their lobbyists would assert that compliance would be too burdensome.

    ** Yes, I am aware that the SEC only has rule making authority and cannot actually pass legislation. The point of the sentence is to highlight the odd relationship Executive branch government agencies like the SEC or law enforcement often have with the Legislative branch.

  10. MikeN says:

    I think the government needs to look into EBay, and craigslist and regulate it. I’m sure newspapers would be happy to take the government side in this dispute.

  11. foobar says:

    #10 That’s the funniest thing I’ve read all day.

  12. yea says:

    Gee Wiz SEC why start doing your job now. I mean with that whole Madoff thing and all.

  13. Glenn E. says:

    This is probably a so-called “practice” that’s been going on for a while. Nothing new, just because Facebook may be involved. But the SEC may be interested in policing this, only now, because the major Wall Street fat cats got left out in the cold. And aren’t being allowed in to control what’s happening. Yeah, you can bet that the billionaires are pissed off somehow. So they’ve got their SEC dog to sniff out the improprieties that they got left out of. That’ll teach those small time VCs, to try gaming the system the way the big boys do.


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