The Securities and Exchange Commission is looking into the trading being done for shares in private companies that are expected to go public, Dealbook is reporting.
Much of that so-called “secondary trading” is happening in tech companies, specifically the social networking giants Twitter, Zynga and Facebook–especially Facebook.
The increase scrutiny could implicate New York City’s own SecondMarket, which Dealbook calls “the leading trading exchange” handling these types of trades. SecondMarket is on track to do $400 million in trades involving about 40 private companies this year according to the company.
Last month, SecondMarket auctioned approximately $40 million worth of Facebook stock.
The stock comes from employees, although the company has banned employees from selling their shares and new employees are issued restricted stock that only has value if the company goes public or gets bought.
Some exchanges create an entity to buy the shares, and then sell positions in the entity to multiple investors. The SEC may decide that this workaround constitutes additional investors, which would throw a wrench in all this sub-public activity. Companies are subject to disclosure requirements when the number of shareholders exceeds 499.
SecondMarket directly connects shareholders of private company stock with buyers, and does not create funds or other vehicles to purchase shares.
SecondMarket hasn’t been contacted by the SEC yet, the company told The Wall Street Journal.
UPDATE: This post originally incorrectly stated the way SecondMarket sells shares of Facebook and other private companies. SecondMarket directly connects current shareholders with buyers.
ajeffries [at] observer.com | @adrjeffries
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