Private Stock Trades Investigated By SEC

If the SEC has its way, the murky market in private company stock may soon become more transparent.

Investors are jumping at the chance to buy stakes in hot technology companies, but the process by which shares of those privately-held companies are traded is relatively unregulated. Even the most sought-after private companies -- like Facebook and Twitter -- don't have to disclose basic pieces of financial information, forcing most outsiders to simply guess about a company's income and profit. The market is exclusive, the valuations are high and the transactions have relatively little government oversight.

The Securities and Exchange Commission is investigating whether that system is tainted by conflicts of interest, as few parties control crucial information, the Wall Street Journal reports.

Earlier this year, Goldman Sachs' $450 million investment in Facebook put the bank in a position of enormous power. Goldman planned to offer its clients investments in Facebook totalling $1.5 billion, while collecting hefty fees for entering and exiting those deals. In a bizarre technicality that allowed the deal to go through, all of these clients counted as one investor, keeping Facebook's number of investors below the limit of 500.

Facebook's financial information isn't public, but the deal valued the company at $50 billion.

The deal was widely criticized. The New Yorker's John Cassidy said it was "making a mockery" of the SEC, by seeming to blatantly exploit loopholes in the law. Soon, citing "intense media attention," Goldman changed its plans and said it would offer Facebook investments only to clients outside the U.S.

It was this deal that reportedly increased the SEC's interest in privately held companies.

In the SEC's view, the role of brokerage companies in private stock trades could present a conflict of interest. These companies connect owners of private stock with potential buyers, providing the parties with information to help them settle on a price. But the brokers take a fee -- usually a percentage of the value of the transaction.

The market for "private placement" sales of company stock is not new, but its been picking up steam in the last few years. Facebook and Zynga employees have offloaded shares at SecondMarket, which, unlike some other brokerages, is regulated as a broker-dealer. Facebook and Zynga have attempted to discourage such selling by imposing fees on owners who cash out, Bloomberg reported last fall.

The chief executive of SharesPost, another middleman firm that handles these private stock sales, described his company as an "information portal," according to the WSJ. The information that the company provides helps determine how much money the company makes.

Comments

[lovbug]

07:59 AM on 02/25/2011

Why is it that unattractive men are always the wealthiest? ugh.

[bkerensa]

04:03 AM on 02/25/2011

I think the sale or brokering of private stocks should not be allowed since it allows people to accrue assets that are totally hidden from the IRS and other financial agencies.

[wwwTHENOIREFFECTcom]

11:58 PM on 02/24/2011

Glad they're getting at it before it becomes a bigger issue.

[nypapajoe]

05:29 PM on 02/24/2011

Goldman Sachs the real treasury of the USA probably the government also? Who are these guys that got their hands in everything?

[bogey1]

10:08 AM on 02/24/2011

once again Goldman Sachs at the center of financial shenanigans....

[Drmhp]

12:51 AM on 02/24/2011

The perfect set up to short facebook. Goldman is going to sack their clients again and live up to their name again.

[Drmhp]

12:48 AM on 02/24/2011

Can we really trust the sec any more after the pathetic christopher cox?

[Arts4u]

10:26 PM on 02/23/2011

Thank you! Facebook over-speculation is yet another disaster waiting to happen.

[Gabe Views]

02:00 PM on 02/23/2011

SEC do check out the undelivered trades; the naked shorts that drove the value of markets to the depths; the securities involved were NEVER OWNED by the shorters.Why is this fraud not a focus of investigation?!

Afraid of stepping on billionaires' Berlutis?

[zrants]

01:55 PM on 02/23/2011

Why don't does't the government start using the anti-trust laws to limit the size of too big to fail mergers and buy-outs that kill more jobs than they generate before moving off-shore to take advantage of cheap labor and financing deals offered by other countries.

[TheTightwireGuy]

01:42 PM on 02/23/2011

I agree that the SEC should police this market to the extent that it does not violate the rules that restrict the types of investors that participate in these deals. The intent of the SEC was to provide safeguards for the broad investing public to protect them against abuses by unscrupulous investment managers, market makers and company executives. It is NOT to guarantee access to ALL financial investment markets for the broad public. And it can hardly do its current mission effectively without meddling by the Congress to influence it's enforcement of existing regulations and review of new regulations intended to enhance its effectiveness.

It should close the loopholes that keeps the general public out of this market and keep up vigilant monitoring of the broad public markets to promote their fairness.

[jeffp26]

01:35 PM on 02/23/2011

The SEC under Mary Shapiro is more inept than it ever was (if that is possible) and cannot pay proper attention to publicly traded stock. So now it wants to regulate private sales?

Good luck with this, Smoke-and-Mirrors-Mary. (The law doesn't allow this, but then why would Mary Shapiro know the law!!!)

[brux]

01:00 PM on 02/23/2011

Just another way to concentrate money in private hands and reward people who are already very rich.

[cassie reinara]

12:23 PM on 02/23/2011

A lot of these crooks should have went to jail a long time ago, but in our capitalistic society, we allow the fraudsters to rule and dictate how we should live our lives. Some people are too ignorant to even realize when they are being had.

[spoonbill1963]

12:15 PM on 02/23/2011

More regulation?
Oh, joy.

[Arts4u]

10:35 PM on 02/23/2011

You don't get it do you?

'Goldman consolidated a number of its clients into a single artificial "investor" to get around a legal requirement that any company with more than 500 investors be publicly traded and subject to the regulations that protect investors. Felix Salmon observes that this deal is bigger than many IPOs, but doesn't have to follow any of the same rules.

Goldman sure knows how to create a feeding frenzy. They wouldn't let anybody into the deal for less than $2 million -- a surefire way to make the marks salivate -- and touted the deal shamelessly to its clients. Former Goldmanite Nomi Prins captures the essence of the deal: create an artificial bubble and then "pawn off the overpriced goods on the clients." As Prins notes, Goldman's giving itself the option to unload this investment if it goes bad, but it's locking its clients in until 2013.

The country learned their M.O. after the last crisis by reviewing their internal emails, and by the cynical and lawless way they played clients in the ABACUS deal. To avoid legal trouble this time around, Goldman's even disclosed in advance that it may short Facebook.'