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.