SEC Scanning Tech Giants Over Private Stock Trading


What would you do if you had half a million dollars set aside to invest into the next Apple, Facebook, or Twitter? You’ve been asking yourself the same question, haven’t you? Well, if you aren’t already rich, hot privately held startups are out of your reach.

See, privately held companies like Twitter, Facebook, Zynga, and LinkedIn rely on private exchanges, legitimate places where stocks change hands.

The trading happens between former employees or venture capital investors looking to exit their stakes on one side and Wall Street brokerage firms and speculative investors who invest into hot startups before the general public can on the other.

Several private exchanges now exist with the mission to match buyers to sellers in those firms. However, the practice of stock trading in privately held companies seems to have caught attention of government regulators, two sources told Peter Lattman on the New York Times’ DealBook blog:

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.

According to several securities lawyers who spoke with the paper, SEC’s inquiry "could relate to understanding the number of shareholders at these companies."

If the number of shareholders zooms past 500 people, the author explains, the company is obliged by law to disclose its financial results to the public.

The catch 22 is in that SEC may or may not count investors in funds which gather small Wall Street firms that acquire blocks of stock of these tech startups.

Which brings me to an inevitable conclusion – isn’t it about time Facebook goes public? What is the point of a privately held company if it’s allowed to trade stocks – but only between the parties that already have lots of money?

In case you didn’t know, current rules in place allow only accredited investors – that is, those whose net worth is $1+ million – to buy their shares. Feel free to chime in with your thoughts in the comment section below.

Source: The New York Times’ DealBook blog