SEC investigating private market for shares of Facebook, Twitter

The Securities and Exchange Commission is looking into the increasingly hot market for shares of privately-held social networking companies Facebook, Twitter, Zynga and LinkedIn.

The New York Times reported late Tuesday that the SEC has sent information requests to several individuals involved in the buying and selling of shares in those firms, all of which are privately held. The shares often come from former employees or early investors looking to cash out.

New private exchanges have also emerged to match buyers with sellers; SharesPost and SecondMarket in particular have seen brisk trade of Facebook shares in the past month, with the average value of the company rising almost 25 percent to $56 billion based on SharesPost transactions. SecondMarket said Facebook had increased in value by 12 percent over the same period.

“We are serving a growing need,” David Weir, chief executive of SharesPost, told the Times. “A decade ago, these companies would be public by now. Investors can now buy into these businesses and sellers can exit their already valuable stakes.”

Some Wall Street firms are responding by pooling client funds in order to acquire blocks of Facebook or Twitter shares, since only institutions that manage above $100 million in assets are allowed to purchase the shares. The risk is substantial; private firms are not required to disclose their financial results and there is still a great deal of uncertainty regarding how firms like Twitter will monetize their huge amount of Web traffic.

Another consequence of the feverish private trading: it may push the firms towards an initial public offering sooner than planned. Many of the investors appear to be banking on just that; an IPO like Google's in 2004 could potentially deliver huge returns.