SEC looking at trading of shares in private companies

Growing trend draws federal scrutiny amid concerns over funds set up for investors

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On Tuesday, the Wall Street Journal published a fascinating article about the growing market for "shares" of private tech companies such as Facebook, Twitter and LinkedIn. I blogged about it here.

Turns out the federal Securities and Exchange Commission also has expressed an interest in the trading of private tech shares. From the New York Times:

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.

This "red-hot trading market" is in large part the result of an ice-cold environment for initial pubic offerings. Wealthy investors looking for action increasingly are turning to shares of private companies. Their bet is that they'll get a big payoff with an eventual IPO. They find sellers in former employees of a company or early-stage investors looking to cash out.

The best guess among legal experts is that the SEC wants to find out how many investors -- or shareholders -- each company has. That matters because under SEC rules, if private companies have at least 500 investors, they have to make financial results public.

The SEC probe is in the preliminary stages. It may be months before we know if it's going to get past that.

Chris Nerney writes about the business side of technology market strategies and trends, legal issues, leadership changes, mergers, venture capital, IPOs and technology stocks. Follow him on Twitter @ChrisNerney.

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