The pre-IPO trading on platforms such as SharesPost and SecondMarket has led to as many questions as it has sky-high valuations. The environments, in which companies like Facebook have achieved valuations of $80 bn without having gone public, have attracted the attention of regulators, an unsurprising development. In a preemptive move, it seems, SecondMarket has reached out to the Securities and Exchange Commission, the Wall Street Journal reports, for guidance on how to handle private transactions.
According to the Journal:
The New York firm has held preliminary talks with the Securities and Exchange Commission about a potential “no-action letter” that would essentially guide SecondMarket on how to operate. SEC officials issue such letters in response to requests from individuals or entities who aren’t certain whether a particular product or action would violate U.S. securities laws.
It’s interesting that SecondMarket is seeking guidance, but when you the amount of money that’s involved, proactive behaviour appears to be smarter. The Journal notes that approximately $4.6 bn in ‘closely held’ company shares was traded last year, almost double the $2.4 bn in transactions the year before.
SharesPost is also taking action. The company applied to become a broker-dealer back in January.Why are the likes of SecondMarket and SharesPost looking for clarity? Well, this puts it best:
Some legal experts foresee a flurry of lawsuits from investors who bought privately traded shares at sky-high prices. “This is litigation waiting to happen, and it will arise when the downturn comes,” former SEC commissioner Joseph Grundfest recently told a seminar at Stanford University, where he is a law professor.