SEC Takes Action Against Funds Invested in Pre-IPO Shares

Simon Riveles Uncategorized

The last several years have seen exponential growth in the trading of private company on second market exchanges such as SharesPost, Brogger and SecondMarket. Social networking sites such as  Facebook, Twitter and LinkedIn are only a few of a variety of late stage companies being traded pre-IPO. Shares in these companies most often become available when an employee seeks to cash out of some or all of their company’s stock. These markets have proliferating despite the prohibition under the securities laws limiting ownership in a private company to 500 shareholders. Brokers have navigated around this prohibition by pooling the investment of many high net worth individuals and institution for the sole purpose of investing in one or more of these pre-IPO high fliers. This new market has not gone without drawing regulatory scrutiny. After a year long investigation, the SEC recently determined that several brokers advisers managing pre-IPO funds had violated the securities laws. On March 24, 2012 SEC filed a complaint against several firms and individuals for having misled their investors as to the compensation they earned, and the amount of private company stock actually owned by the fund, the self dealing in which they engaged and material information about pre-IPO companies.

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