SEC Goes After Those Offering Facebook Shares Pre-IPO
from the crackdown-time dept
After Sarbanes-Oxley came into effect, it made it exceptionally more difficult for startups to go public. The additional expense of going public was prohibitive for all but some of the very, very biggest success stories. Clearly, in the late ’90s it was too easy to go public, but Sarbanes-Oxley went too far in the other direction. There are some efforts underway today to carve out some reasonable exceptions for successful, growing startups that will allow them to go public without taking on the full expense of SOX compliance, but the other thing that happened was that the industry just routed around the limitations, often setting up private secondary markets/exchanges for pre-IPO shares. In many ways, this is a worse situation from a public policy situation, because it limits these markets to just those well-connected enough to access them, rather than to the wider public.
Of course, I’ve also wondered how these were legal, as they often appeared to be offering up shares outside of the basic rules of equity offerings under the SEC. It appears that the SEC has finally noticed this as well:
Securities regulators took enforcement action against an online trading platform and two private funds offering Facebook shares on Wednesday, the first action in a year-long probe into the lightly regulated world of private company-share trading.
The Securities and Exchange Commission charged SharesPost, which matches buyers and sellers of private shares, and its CEO Greg Brogger with failing to register as a broker-dealer before offering the securities.
The SEC also brought charges against two private funds and their managers for allegedly misleading investors about hidden fees in Facebook stock offerings.
Of course, this is all going after the symptoms of the larger problem, rather than dealing with the actual problem, created by excessive SOX rules. Allow for a more reasonable setup for successful companies to actually access the public markets, and there’s no more demand for these private offerings.
Filed Under: equity, ipos, private markets, sarbane oxley, sec
Companies: facebook
Comments on “SEC Goes After Those Offering Facebook Shares Pre-IPO”
Interesting article, maybe you can do some posts on exactly what rules need to be changed, what are the negative impacts of these rules that need to be changed, and how they need to be changed.
“Allow for a more reasonable setup for successful companies to actually access the public markets, and there’s no more demand for these private offerings”
Facebook would have no problem accessing the public markets, they are just choosing not to! Maybe it’s because they think they will get a better value if they wait, maybe they don’t want people to peek under the covers and see that the actual cash flow generating potential is much less than it is percieved. Many other possible reasons…
Some rules that facebook / sellers of the private shares are breaking deal with requirements for public listing. For example a private company can’t have more than 500 shareholders, and if you have a private market to exchange pre-IPO shares, you will likley exceed this.
Wedbush Securities has been trying to offer private shares / establish a private shares group (Grey area?). I belive they were trying to sell shares of facebook as well. They even sent out a blast email offering the shares (a no-no) and some of their potential clients (of other services, not private shares or brokerage) were shocked to see this, and even asked people, how can they do this?
Anyway, not much worse than other things going on in the financial circus.
After WW2 it became cost prohibitive and regulation prohibitive to operate most international merchant marine cargo ships from first world countries, in particular the US and the UK.
Realizing this ownership was switched from first world countries registration to third world flag of convenience registration. This ships will never be in the registering country anyway so the political instability of such countries is of no consequence.
In the 1990s the owners of shipping realized that the principals used for flag of convenience ship registration could just as easily be applied to companies. Companies could formulate their charter and stock offerings in third world countries using the concept of flag of convenience and hold all real assets in first world countries. You now have oil companies register as a public holding company in places like Panama with assets of private company in the first world countries like the US and other assets of wholly owned private companies in places like Arabia thus avoiding the conflict between first world labor law and Sharai law.
It being only a very trivial exercise in thought expansion to expand the concept of flag of convenience public companies to be expand into IPO and other form of corporate ownership the initial expectations of Sarbanes?Oxley Act may not be realized but something very different may result.
Re: Re:
It’s already happening. Quite a few companies go public on AIM in London and Prada recently went public in Hong Kong.
It’s generally much easier to access capital markets overseas vs the US, the reason more people don’t do it is because of the added complexity.
Not that much of an issue
1. SharesPost is in trouble because it didn’t register as a broker and is brokering securities. Duh.
2. Other markets have no issues and there are at least 1/2 dozen others. Besides, a very, very well informed source tells me that few shares are actually sold in any secondary transactions as companies almost always exercise their right of first refusal.
3. The 500 shareholder limit is almost never an issue because it only applies to people in the US and most of the demand is from overseas. Also, most (all?) SEC rules related to private stock transactions only apply in the US, which is why quite a lot of secondary activities take place overseas.
Really this is about the SEC going after people doing stupid things – e.g. brokering stock transactions without a license and advertising private stock for sale, both of which are big no-nos & finance 101. These people deserve to have the book thrown at them.
Other than that, there is really no story here.
Chris.
Re: Not that much of an issue
Really this is about the SEC going after people doing stupid things – e.g. brokering stock transactions without a license and advertising private stock for sale, both of which are big no-nos & finance 101. These people deserve to have the book thrown at them.
Other than that, there is really no story here.
So other than all the stuff the story is about, there’s no story. Got it, thanks!
Re: Re: Not that much of an issue
No actually, there is just no story here. It’s not about Facebook really, it’s about protections put in place to stop fraud. It isn’t something that drives companies offshore, and it certainly isn’t happening in this case because the market is “too hard” to enter. Rather, they are just trying to milk it for all it’s worth.
Once again, Mike is amazed by shiny objects. Maybe that’s why he hired Marcus to write for the blog (and got rid of Nina Paley… thankfully!)