SEC could focus on secondary market platforms

US securities regulators are looking at how investors trade shares in four privately held companies, according to reports, but the inquiry may broaden to the exchanges and trading platforms that facilitate these transactions, experts said.
The two main online trading platforms for private company shares, SecondMarket and SharesPost, have been growing fast. SecondMarket has closed on about $400 million of private company deals this year, up from $100 million last year. So far SharesPost has signed up about 39,000 registered members.
That fast growth could attract regulators who are concerned about whether these markets can be manipulated by insiders, said Robin Bergen, a partner at Cleary Gottlieb Steen & Hamilton.
The US Securities and Exchange Commission could also look at the fees these companies are charging for linking up buyers and sellers, and how the trading sites ensure that buyers are eligible to purchase securities from private companies, said Alan Berkeley, a partner and securities regulatory lawyer at K&L Gates.
These companies "will be intensely scrutinised and will be the subject of SEC regulation before very long," Berkeley said. The SEC may have an easier time with scrutinising SecondMarket, because the trading platform is already registered with the SEC as a broker-dealer. "That would be a clear hook for the SEC," Bergen said.
Registration means that SecondMarket is subject to disclosure requirements and oversight by the SEC and the Financial Industry Regulatory Authority. A report in the New York Times on Tuesday said the SEC has asked for information from parties involved in buying and selling the stock in four companies, including Facebook, Twitter, Zynga and LinkedIn.
An SEC spokesman declined to comment. SecondMarket is a broker dealer and says it is fully compliant with all rules and regulations, while SharesPost - which is just an automated platform with a third party bank and escrow agent - is not required to.
"We welcome whatever examination that the SEC may undertake here," SharesPost CEO David Weir said, adding that his company has been talking to regulators since before its launch.
Every transaction that SecondMarket conducts is scrutinised by the SEC and FINRA, said Mark Murphy, a company spokesman. The SEC has not approached his company for information, Murphy said.