Until recently, investors seeking shares of the hottest privately held technology companies — such as Facebook Inc. — had to wait until the company decided to conduct an initial public offering of shares. Likewise, private company shareholders — including employees and former employees — often lacked a viable means of achieving liquidity for their private company stock. Now, however, companies such as SecondMarket and SharesPost Inc. provide a marketplace to holders of private company shares to offer their shares for sale. According to a recent article in Wall Street Journal, the sales volume of stock in privately held companies has exploded from an estimated $2.4 billion in 2009, to $4.6 billion in 2010, to a projected total of $6.9 billion in 2011. With this growth has come a flurry of regulatory activity and potential litigation risk for all involved.
Most of the regulatory activity relates to the SEC requirement dating from 1964 that private companies with more than 500 shareholders register with the SEC and make public disclosures of financial information. Most of the litigation has arisen from the increased number of sales of private company stock by current and former company employees to third parties. Examples of litigation include a claim by a hedge fund against a technology company for supposedly interfering with its purchase of shares from a company shareholder, and a claim by another investment fund against SecondMarket based on the fund’s attempt to purchase shares of Facebook stock.
The Players
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