SEC casts wide net in private stock trading probe

The SEC's secondary market investigation is probing not just the exchanges, but also social media companies and at least three investment funds including GreenCrest Capital.The SEC is probing secondary market exchanges and at least three investment funds, including GreenCrest Capital. By Julianne Pepitone, staff reporter


NEW YORK (CNNMoney) -- You can't buy shares of Facebook yet, but that hasn't stopped wealthy individuals and investment funds from snapping up its stock on rapidly growing exchanges like SecondMarket and SharesPost.

Now the SEC is taking a closer look at so-called "pre-IPO" trading in Facebook and other private companies to see if securities laws were broken. An ongoing investigation is probing not just the exchanges themselves, but also several red-hot social media companies and at least three investment funds that specialize in buying up their shares.

The firms under the microscope include EB Exchange Funds, Felix Investments and GreenCrest Capital, which have created investment pools that aim to buy up shares of hot ventures. A graphic on the front page of GreenCrest Capital's website hints at the kinds of investments it targets: Facebook. Twitter. Groupon. Zynga. Foursquare. Yelp.

Private investors have always been able to purchase equity in companies whose shares don't trade publicly -- that's how venture capitalists and angel investors operate. Those negotiations happen quietly, among parties that federal regulators regard as sophisticated investors.

But over the past year, the transaction volume has soared on eBay-like platforms that connect private-stock buyers and sellers. SecondMarket, the field's largest and most prominent pioneer, says investors spent $200 million on its exchange last year buying shares of Facebook alone.

That drew the attention of the SEC, which in late December sent a "voluntary request for information" to several industry participants, including SecondMarket.

Those information requests have morphed into a law-enforcement investigation, according to the SEC's response to a series of Freedom of Information Act requests filed by CNNMoney seeking details of the agency's communications with major players in the private-stock market.

The SEC denied all of the requests, citing a FOIA exemption known as 7(A). That exemption shields records compiled for a still-ongoing law enforcement investigation.

In addition to its communication with the three investment funds, the SEC shielded its records relating to SecondMarket and SharesPost, and to four of the tech world's hottest companies: Facebook, Zynga, Twitter and LinkedIn.

GreenCrest, Felix and EB Exchange did not respond to requests for comment. Facebook, Zynga and LinkedIn declined to comment.

A Twitter spokesman said, "We don't believe we're the subject of an investigation."

The two exchanges would not comment on the specifics of their communications with the SEC, but both said they keep the agency abreast of their general activities.

A SecondMarket spokeswoman said the company "is a registered broker-dealer, fully regulated by the SEC and FINRA."

In an e-mailed statement, SharesPost CEO Dave Weir said his company "does not comment on any specific confidential discussion with any third parties."

But Weir also noted that since SharesPost launched, it "has made efforts to keep the SEC's staff appraised of the evolution of its marketplace and we have made every effort to structure our activities to be compliant with previous staff guidance regarding those activities."

Private markets like SecondMarket and SharesPost are more lightly regulated than public exchanges like Nasdaq and the New York Stock Exchange. That's because "retail" investors -- your average mom-and-pop stock buyers -- can't shop on them. Only accredited investors, like investment funds and individuals with a net worth of at least $1 million, can participate.

The SEC assumes those wealthy buyers can take care of themselves, so it doesn't require the kind of financial disclosures public companies have to make. That's why Facebook has been able to keep its revenue numbers secret -- even from the investors who are sinking significant cash into shares of its stock.

A fast-changing market

In an ironic twist, the secondary market's success could be its downfall.

Investors eager to snap up shares of Silicon Valley's hotshots are fueling the private exchanges' growth and have bid the shares of some companies traded there up to dizzying heights. Recent investment rounds valued Facebook at $50 billion and Twitter at nearly $4 billion.

Those eye-popping valuations are luring gun-shy tech companies off the sidelines and back into the IPO fray. Within the past month, some of the private-stock market's prize ventures -- including Internet radio site Pandora and business networking site LinkedIn -- have filed paperwork to go public.

Even Facebook doesn't plan to stay private much longer. The company recently said it plans to begin filing public financial statements by April 2012. It's likely to IPO at that time, making the secondary exchanges' most sought-after shares available to any buyer with a brokerage account.

Which means the risky shadow market that took off in 2010 could fizzle out just as quickly as it exploded.  To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 17,804.80 26.65 0.15%
Nasdaq 4,765.38 16.98 0.36%
S&P 500 2,070.65 9.42 0.46%
Treasuries 2.18 -0.03 -1.27%
Data as of 5:44am ET
Company Price Change % Change
Bank of America Corp... 17.62 0.09 0.51%
Apple Inc 111.78 -0.87 -0.77%
General Electric Co 25.62 0.48 1.91%
Intel Corp 36.37 -0.65 -1.76%
Microsoft Corp 47.66 0.14 0.29%
Data as of Dec 19

Sections

New York Magazine reporter Jessica Pressler, who has been caught up in controversy this past week, will not be moving on to a new job at Bloomberg News. More

Investors beware: These 5 global crises are likely to rattle the stock market and world economy. More

Forums in dark corners of the web sell the kinds of hacks that befell Sony. More

Unilever sued Hampton Creek over its egg-free mayonnaise spread Just Mayo. But the company behind Best Foods and Hellman's mayonnaise has now dropped the lawsuit. More

The income of the top 1% jumped significantly in 2012, far outpacing inflation. Not only did this group make a larger share of the country's income, their share of total taxes also jumped from 35% to 38%. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.