Goldman Sachs (GS.N) this week approached its best private wealth clients with a tantalizing offer: a special fund that will own shares in the fast-growing social networking giant. Goldman gets to offer clients a hot investment opportunity, while Facebook gets to remain a private company.
It is the latest in a growing trend: the blurring of public regulated markets and hands-off private markets.
That trend had drawn the attention of the Securities and Exchange Commission, which now must determine if it can build an enforcement case cracking down on investors and companies potentially skirting the rules on the books, or if it needs to clarify those rules itself.
"You have a lot of people who could probably create private markets that rival the public ones to deliver large amounts of capital to big companies without triggering all the burdens of being a public company," said Donald Langevoort, a professor of securities regulation at Georgetown University.
Small companies traditionally launch with the ultimate goal of completing an initial public offering and obtaining a listing on a national exchange. Yet reporting requirements and other regulatory hurdles have made that path less attractive, while new technology and alternative sources of capital make going public less critical.
That has contributed to a rise in online trading platforms that match buyers and sellers of privately held companies.
SecondMarket Inc, an online platform that hosts the trading of shares in Facebook and other private companies, on Monday told Reuters it received a request for information from the SEC on Friday. The SEC declined to comment on a potential probe into private market trading.
Under U.S. securities law, if a company's private shares are held by more than 500 holders of record, the company is required to register with the SEC and file public disclosure statements. But the rules generally define the term "record holder" as the name displayed on the company's stock record, and not the beneficial owner of the stock.
That means firms like Goldman Sachs can potentially skirt public disclosure rules through the use of a special investment vehicle. These funds can offer numerous investors the opportunity to buy stock, but the shares are all listed in the name of Goldman Sachs and only count as one shareholder of record.
Some securities lawyers say the SEC could choose to intervene if it concludes Facebook intends to skirt disclosure rules.
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