Econintersect: SecondMarket and SharesPost are the two largest private company stock exchanges. SecondMarket is an SEC regulated broker-dealer. SharesPost operates under a different business model as a “passive bulletin board” within the meaning established by the SEC in certain No-Action letters. Passive bulletin boards are not required to register with the SEC as an exchange and are not required to be broker dealers. Accordingly, SharesPost has not registered with the SEC as either an exchange or a broker dealer at this time.SecondMarket was founded in 2004 (as Restricted Stock Partners) and launched its private company stock marketplace in April 2009 to facilitate exchanges of private company stocks. SecondMarket deals with exchanges of a variety of illiquid assets including asset backed securities, auction rate securities, bankruptcy claims,CDOs (collateralized debt obligations, limited partnership interests, MBS (mortgage backed securities, private company stock and restricted securities.
Facebook stock comprised a big block of SecondMarket’s $158 million business volume in the fourth quarter.
The SharesPost bulletin boards were designed to meet the criteria for a “passive bulletin board” within the meaning established by the SEC in certain No-Action letters. Passive bulletin boards are not required to register with the SEC as an exchange and are not required to be broker dealers. Accordingly, SharesPost has not registered with the SEC as either an exchange or a broker dealer at this time. SharesPost was founded in 2009.
Sharespost is not for the casual investor who wants to nab a few shares of Facebook for fun. Each transaction incurs a $2,500 fee (for both buyer and seller) from US Bank. And you must be an “accredited and sophisticated buyer” under SEC Regulation D, which limits the universe of buyers to people with substantial invested assets and experience. There is no such limitation for sellers.
TechCrunch has reported that SEC has made inquiries recenbtly about private stiock markets. From TechCrunch:
The Securities and Exchange Commission is asking questions about private stock markets like SecondMarket and SharesPost. The SEC has sent “information requests to several participants in the buying and selling of stock” to a number of companies, reports the New York Times (although private market SecondMarket says they have received no request from the SEC). [Update: An earlier version of this story indicated that the private markets themselves received the information requests from the SEC, but the New York Times does not specify which firms were contacted].
Over the past year, trading in shares of still-private companies such as Facebook, Zynga, and LinkedIn has skyrocketed, allowing employees and early investors to sell their shares even without an IPO. About $400 million worth of shares will pass hands this year on SecondMarket, which is the largest of the private exchanges, up from about $100 million in 2009. The lack of liquidity because of the general postponement of IPOs among many Internet startups is fueling this growth. Only qualified institutions and high net-worth individual investors are allowed to participate in these markets, but as more and more shares trade hands the SEC’s 500-shareholder rule could be triggered which would require the companies to report audited financial results just like a publicly-traded company.
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