Efforts are underway to provide transparency and increased controls to the secondary market for private company shares, like those of Facebook.  But don't expect to find the Securities and Exchange Commission in the forefront. 

Instead, it's SecondMarket, the largest of the secondary market exchanges, which recently introduced a new trading platform and rules which should lead to more transparency and better cooperation with private companies. 

Investment firm GreenCrest Capital also is taking the lead, unveiling a new research service that will compile reports on popular Web start-ups like Twitter and Groupon for clients of its private-company funds. 

SharesPost, yet another marketplace for private shares, has filed to become a regulated broker-dealer - a move that would put it under FINRA oversight.  "We filed an application, but these things take a long time," said CEO David Weir.  "It will give us more flexibility in the kinds of activities that we want to engage in."

    SEC, FINRA Behind The Scenes.   While the above firms said their actions represented strategic decisions, it's quite apparent that much of their motivation comes from industry critics and regulators.  In late 2010 and early 2011, the SEC has been expanding its inquiry into the secondary market and scrutinizing the trading activity of private Internet companies like Facebook, Twitter, Zynga and LinkedIn.

More recently, both regulators publicly voiced their concerns.  SEC Chairman Mary Schapiro told a House appropriations panel that the Commission was looking into rules that govern trading prior to an IPO.  That same day, FINRA issued a warning about pre-IPO scams and advised investors to only use licensed brokers.  In a separate statement, the SEC said that it was "aware of a number of complaints and inquiries about these types of pre-IPO investment scams, which may be promoted on social media and Internet sites."

The warnings, presence of the regulators, and opaque nature of the secondary market have not dampened investor interest - a block of Facebook shares recently traded on SecondMarket for $30 a share, giving the company a valuation near $75 billion (a 50% markup over Goldman Sachs’s January investment in Facebook).

“Secondary transactions are here to stay. They will grow in importance,” said Ranan Lachman, a managing director at GreenCrest. Mr. Lachman recognizes that the market is imperfect and evolving, but he contends it will become more transparent over time, as the less-professional entities are flushed out.

    GreenCrest's Equity Research Service.   With the creation of its new equity research service, GreenCrest hopes to put together financial reports for the top private Internet companies - many of which are sold through its funds.  GreenCrest, like other investment firms, offers single-company funds (including ones for Facebook, Twitter and Zynga) and more blended funds, which hold a basket of Internet company shares, according to one person close to the firm, who was not authorized to speak because of concerns about the S.E.C.’s continuing inquiry of the secondary market. GreenCrest declined to comment on its trading activity.

The new research service, which will be led by a team of former analysts at Wall Street firms, will draw from publicly available financial information and interviews with the company’s investors, employees and industry experts. One GreenCrest analyst, according to Mr. Lachman, recently traveled to Chicago, where he talked to several people close to Groupon. From his meetings, he learned about Groupon’s sales numbers for February, which he was then able to use for his analysis. Although there is an inherent conflict of interest here, as GreenCrest buys and sells shares in these Internet companies, Mr. Lachman says this is still far better than the alternative of no information at all.

“It’s a huge leap forward,” he said. “There is a conflict of interest to some extent — we do seek to do business with the companies we cover. However, our investors will keep that in mind before they make their investment decisions.” Unlike some firms, GreenCrest caters only to institutional investors.

The chief executive of SharesPost, David Weir, says he is also trying to help investors become more informed. SharesPost, which is open only to accredited investors, offers 230 research reports and publishes the trading history for each company. Prospective clients must also pass a multistep qualification process to ensure that they meet the financial requirements, including a net worth of at least $1 million or an annual salary of at least $200,000 in the last two years. While the information is self-reported, leaving room for exaggerated answers, Mr. Weir contends the controls are sufficient. “It’s very hard to police fraud,” he said.

Ben Horowitz, a partner at the venture capital firm Andreessen Horowitz, is still concerned that there is not enough regulation in the secondary markets to protect investors.

In a meeting with reporters on Wednesday night, he called the availability of information “asymmetric” and predicted that some of these exchanges would run into problems with the S.E.C. He is also worried that the constant trades are damaging private companies, which have to worry about valuation numbers that are disjointed from their internal calculations. As the exuberance in Internet companies grow, he said inflated valuations on the secondary market could lead to arguments with shareholders and employees if the company does a private placement at a lower price, or if its I.P.O. prices at a more modest level.

Mr. Weir is unfazed by the criticism. Like Mr. Lachman, he believes the secondary market will continue to flourish.

“Take what people say with a grain of salt,” he said. “We are opening the market to a broader range of investors — there are a lot of positive benefits for the marketplace. We’re helping fund innovation.”

[DealBook, 3/18]