February 23, 2011, 6:42 PM — The Securities and Exchange Commission is widening an investigation into the hot secondary market for shares of private companies such as Facebook, Twitter and Zynga.
From the Wall Street Journal:
The move is part of a broadening probe by the U.S. agency, still at an early stage, of the thriving bazaar that has sprung up largely beyond the reach of regulators and traditional securities firms. Trades handled by SecondMarket Inc., SharesPost Inc. and other market makers specializing in privately held shares are conveying eye-popping valuations on some companies while disclosing little about their financial results.
(Also see: Judge approves Dell's $100 million wrist-slap in accounting fraud case)
Gee, what could go wrong with that system? But don't worry, because SecondMarket and SharesPost have assured the SEC that they have "numerous safeguards for investors," according to the WSJ. In other words, they can regulate themselves! Nothing to see here; you can all go home now.
Right. As little faith as I have in the SEC to actually do its job effectively, the secondary markets bear scrutiny. Companies such as Twitter and Facebook are being accorded wildly fluctuating valuations worth billions of dollars without having to reveal much about their revenue, profit and operating margins. And how does SecondMarket and SharesPost even determine the valuation of a company? Wouldn't it benefit those market makers to inflate the value of shares in order to stoke interest and make more money as the middleman? How did Facebook go from an implied value of $50 billion in December, after Goldman Sachs and Digital Sky Technologies invested $500 million, to the $84 billion estimated by SharesPost on Friday?
Investors have a right to invest, and that includes the right to invest poorly. But only a jerk would say it's the investor's fault for not knowing if a game is rigged. Speaking of jerks, here's a comment from a guy at the bottom of the Wall Street Journal article that pretty much sums up the "free market" argument:
Look at it this way, if your average widow or orhpan (sic) buys a private security and loses, so what? The capital went to a higher and better use than the stupid widow and/or orphan. Let's get back to privatizing profits and privatizing losses.
The "so what," jerk, would be if they were misled and ripped off. You see, not everyone has an MBA, but everyone should have the right to invest privately with all the relevant facts available. Is that such as big threat to the "free market"?
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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