Going Public by Accident

Private companies may unwittingly find themselves in the public eye when shares are traded too freely.

At least conceptually, the markets have the appealing possibility of aggregating shares rather than dispersing them. “What we offer is a way for 100 employees, for instance, to sell their stock in a one-off transaction to a single investor or institution,” says Greg Besner, CFO of SecondMarket. “Doing this, you actually end up with fewer shareholders.”

According to the most recent data available from SecondMarket, the firm completed $400 million worth of transactions in private-company stock in 2010, four times the dollar volume of 2009. And, says the firm, some three dozen private companies were trading shares on the site as of late last year.

So what’s the problem? While the SEC hasn’t officially announced its concerns, attorneys say the agency is likely worried about the shares trading without any of the standard investor protections, like corporate financial disclosures and regulatory oversight of the exchanges.

(On a practical level, of course, the exchanges could also backfire, by allowing employees an easy way to sell without the company’s knowledge, possibly increasing the shareholder base.)

To the regulatory point, Besner notes that just because companies don’t have to provide financial information doesn’t mean they can’t. “Different companies can volunteer more or less information,” he says, and can also preselect the institutional investors to which they will provide their financial information. What makes it a level playing field is that “buyers in the micromarket are all provided the same information,” he adds.

At some point, in fact, SecondMarket plans to sell its own equity on the micromarket. “When we get to that point, we will provide full financial statements, P&L, cash flow, the balance sheet, and an overview of each of our business lines,” Besner says. Not on its agenda? “Forward-looking projections, which in our opinion are fraught with risk.” — R.B.

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