The Shadow Market for Facebook Shares
The SEC is now actively investigating several tech companies to see if they’ve gone over the 500 shareholder limit for private firms. Intellectually, it makes sense to have secondary markets because they provide private investors access to liquidity (as well as a market derived value for firms). However, US law allows private companies to have a very small number of shareholders. Up until pretty recently it was uncommon for such young companies to have such a volume of trades. Even with this volume, the fact is that liquidity can only be transferred among less than 500 individuals, and in many cases that leads to unrealistic or craze driven valuations. IE: Facebook.
Maybe the limit should be raised beyond 500, maybe there shouldn’t be the volume of trades that there are on Facebook stock (they have an auction every week now). At some point, somebody is going to have to flinch. I’m pretty sure Facebook is going to have to go public much sooner than it probably wanted, and maybe at a much lower valuation. At some point, I’m sure we’ll all find out.
