ADOTAS – While in the past it was trendy to draw an IPO as fast as you possibly could, today’s Internet tech firm says, “Why go public if venture capitalists and other investors keep injecting funds into you?” Mutual fund company T. Rowe Price just poured $190.5 million into Facebook and $71.8 million into social gaming magnate Zynga.
Because these highly valued companies remain private, action on the secondary market — where current private stockholders such as venture investors and employees can trade shares — has drawn the attention of the media for driving up valuations. The market has also drawn some chin-scratching from the Securities Exchange Commission, though it wasn’t exchange operators like SharesPost and SecondMarket that were being scrutinized but company-specific funds that were pooling smaller, nonprofessional investors and giving private companies a loophole out of the Exchange Act registration and regulatory scrutiny.
A new controversy developed last week as Wall Street Journal would-be muckraker Dennis Berman misrepresented the truth (that is, lied) in registering his long-departed grandmother as an accredited investor on SharesPost. The SEC deems accredited investors as having minimal financial assets of $1 million or annual family income of $300,000.
Scandalous, huh? Well, SharesPost CEO Dave Weir sent out an angry email on Friday night explaining that Berman actually proved how well the private exchange’s qualification system worked.
“Our broker and electronic systems detected his fraud and barred him from our platform within six hours of submitting his fraudulent information and long before he would have been able to execute trades,” Weir wrote. “Somehow that fact was treated as a mere footnote to the story, leaving readers largely misinformed and our company unfairly maligned.”
Berman, on the other hand, suggested in his story that he spent “a few days loitering, testing and playing in these private markets.”
But the point of Berman’s deception was not to portray the secondary markets as amateur or crooked operation — yes, he was able to fool the sentries at the gate for a little while and get a look at the inside workings of the secondary market, but he didn’t actually do anything. Buying shares on these exchanges is pretty difficult, he wrote — it’s not Amazon with one-click buying.
Berman did, however, achieve in shedding doubt on whether private markets can scale. His “insider” perspective showed that the exchanges not as big as media hype might make you believe. There are a few huge companies — ahem, Facebook, Twitter, yada yada — drawing attention, but a limited pool of investors (though whether some of these investors aren’t pools in themselves has yet to be answered). In essence, his piece is meant to quell the super paranoid who think the end is near for the public markets and question how much more the secondary markets can swell.
It’s also another sign that if there is a social tech bubble expanding — you know you ponder that question every time Facebook’s valuation jumps another $10 billion — it’s a private bubble and the fallout from it popping will be minimal.