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