Sunday, January 2, 2011

Facebook, Twitter under SEC lens

A red-hot trading market has developed in the shares of the world's leading social-networking companies: Facebook, Twitter, Zynga and LinkedIn. What is unusual is that none of the companies are listed on a public stock exchange. Each is privately held.

Now, the Securities and Exchange Commission wants to learn more about the business of these stock trades. The agency has sent information requests to several participants in the buying and selling of these four companies' stocks, according to two people with direct knowledge of the inquiry who requested anonymity because they were not authorized to speak about it.

It is unclear exactly what has piqued the agency's interest. An SEC spokesman declined to comment on the matter. But the SEC's interest comes as a crop of new exchanges is popping up to facilitate these trades. Over the last year, several private exchanges have matched up buyers and sellers of shares in these fast-growing companies.

Though the volume remains thin, the number of transactions is increasing each month. At the same time, Wall Street brokerage firms have begun forming investment pools to buy these companies' shares. Driving this activity is the social-networking phenomenon, which has created the hottest, and most hyped, segment in Silicon Valley in years.

Businesses like Facebook , the social-networking leader, and Zynga, a popular maker of online games, already generate hundreds of millions of dollars in revenue. Twitter has more than 150 million users, and just received $200 million in venture financing. LinkedIn , another social-networking site, has become a Facebook for professionals.

Who is selling these shares? Much of the supply comes from former employees at these companies and their early-stage venture capital investors looking to exit their stakes. The buyers in these so-called secondary trading markets are mostly wealthy speculators looking to snag a piece of the next Apple, Microsoft or Google before the rest of the in-vesting public can.

Part of what is driving this emerging market is the shifting dynamics of initial public offerings on Wall Street, particularly in the technology sector, as companies take longer to tap the public markets. "We are providing a growing need," said David Weir, the chief executive of SharesPost, an online marketplace for private investments started last year that now has 33,000 registered members.

"A decade ago, these companies would be public by now. Investors can now buy into these businesses and sellers to exit their already valuable stakes." SecondMarket, the leading trading exchange handling transactions in these securities, is expected to execute about $400 million in trades across about 40 private companies this year.