The SEC is investigating conflicts of interest in the marketplace for stock in private companies like Twitter and Facebook, the Wall Street Journal reports.
Secondary marketplaces like SecondMarket and SharesPost connect people who want to sell stock in private companies (often former employees) with potential buyers. Since private companies are allowed to remain, well, private and are not required to file an IPO until they pass 499 shareholders of record, buyers of this stock have little information to go on when deciding how much the stock is actually worth.
Meanwhile, the same secondary marketplaces that are selling the stock are often cited in valuations that have little else to go on. When stock sells, these brokers collect a small percentage, so it’s to their advantage if the stocks sell for a higher price. Some question whether the marketplace could play a role in inflating these valuations in order to fetch a better selling price.
A spokesperson from SecondMarket said that third parties create the valuations based on prices that are negotiated between buyer and sellers on the platform, and called the company “an objective marketplace.”
SecondMarket is already regulated by the SEC as a broker-dealer operation. This means, among other things, that all of its investors must be accredited (read: meet a minimum income requirement) and the deals are subject to SEC oversight. Other marketplaces like SharesPost are not regulated in the same manner. But the SEC, according to the Wall Street Journal, is thinking that maybe they ought to be.
The SEC’s interest in the private stock exchange isn’t new. Its interest was reportedly piqued after Goldman Sachs invested $500 million in Facebook last year and then proceeded to create a “special purpose vehicle” that allowed its clients to invest in the social networking site indirectly. After the SEC started looking into the deal, Goldman Sachs closed the option to its U.S. clients.
Image courtesy of iStockphoto, webking
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