SEC Rules May Force Facebook, Other Tech IPOs

by: Zack Miller

Dealbook has an interesting article out this morning entitled "Share Rules Could Push Offering by Facebook." The success of secondary markets for private company shares like those traded in Sharespost may actually force leading startups like Facebook and Twitter to go public.

A surging shadow market in the privately held shares of Facebook is making such restraint difficult and could spur the company to go public — even as its executives try to tamp down speculation about an initial public offering — much as similar pressure helped push Microsoft and Google toward their own initial public offerings.

The frenzied trading in Facebook, as well as in Twitter, Zynga and LinkedIn, has caught the eye of the Securities and Exchange Commission (SEC). The New York Times DealBook first reported on Tuesday that the agency had asked for information about trading in all four companies.

While it is unclear what exactly the SEC. is focusing on, legal experts say that one clear area of inquiry relates to a federal law that establishes a limit for private companies of fewer than 500 shareholders. Once a company has 500 shareholders, it must register its private shares with the SEC. and publicly disclose its financial results.

The rise of these secondary markets has enabled private companies hitting their mojo to stay private longer as senior management can actively cash-out of the company while the company maintains less than 500 shareholders. Execs sell out, take their money off the table and continue to grow their private firms — without the need to go public.

The SEC is concerned and may force the companies to venture into public markets.