Facebook, Twitter And The Shadow Stock Market


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Mark Zuckerberg, the billionaire founder of Facebook, has been coy about when his ubiquitous social media portal will take the plunge and file for an initial public offering. Thanks to other avenues for liquidity that allow some insiders and early stage investors to sell illiquid shares the pressure on management to go public seems easier to keep at bay, but perhaps not for too much longer.

The SEC is reportedly investigating trading on secondary markets like SecondMarket and SharesPost in the stock of social media companies Facebook, Twitter, LinkedIn and Zynga. My colleague Steven Bertoni profiled SecondMarket creator Barry Silbert in the June 7 issue of Forbes, noting that connecting buyers and sellers in the shares of privately-held tech companies was the company’s fastest-growing market.

That fast growth has clearly caught the eye of regulators. While such markets give qualified investors the opportunity to buy the stock of closely-held companies, they do not offer the transparency into performance or finances required from publicly-traded firms.

The SEC is said to be focusing on whether the secondary market trading has brought the number of shareholders in a company like Facebook above 500. Reaching that threshold triggers requirements for more public financial disclosures, a requirement that in the past has driven companies like Google and Microsoft to pursue IPOs.

Dealbook’s Peter Lattman, who had the story on the SEC investigation Monday, suggested Tuesday that the increased scrutiny into how shares of privately-held shares could push Facebook into an offering. I’m more inclined to agree with Fortune’s Dan Primack, who writes Wednesday that even the prospect of additional disclosures is unlikely to automatically elicit a Facebook IPO.

There are many benefits to being private, besides keeping financial data secret. As a private company, Facebook needn’t meet quarterly earnings projections. It needn’t meet regularly with bank analysts. Or with hedge funds. It also will be better able to keep quiet about non-financial events, such as product strategy and competitive pressures.

via No, the SEC investigation will not prompt a Facebook IPO – The Term Sheet: Fortune’s deals blog.

Even if the SEC’s attention on the space isn’t the shove that sparks a round of social media IPOs, the most likely exit path for these companies is still the public market. At some point insiders and venture capital backers will want to capture some of the rapidly growing value of their investments. That doesn’t necessarily mean any of them will wind up in the IPO Class of 2011. Going public offers as many headaches as rewards given the increased scrutiny and quarter-by-quarter pressure to deliver, but it also offers the only real way to tap the deep pockets of many institutional investors.

[Interestingly, while the big-time private tech companies in the U.S. are taking a patient approach to public offerings, China’s tech titans are flying to market in droves, most recently Youtube-like Youku.com and Amazon-esque Dangdang.]

Follow my blog Exile On Wall Street, or Twitter @SchaeferStreet.

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