Beyond Facebook, SecondMarket Opens Its Doors to Thousands

The marketplace for private Internet companies is about to get a bit more crowded.
SecondMarket, an exchange for alternative investments, will introduce a new trading platform on Friday that will integrate social media and significantly expand its universe of private companies.
The company, based in Manhattan, is already one of the largest marketplaces for private stock. It will add about 12,000 new companies to its exchange— a twentyfold increase from its current pool.
“This is very much based on demand,” said Barry E. Silbert, the founder and chief executive of SecondMarket. “This new platform is the next step in the evolution and the development of the private market and alternative investing.”

The company’s move comes amid surging interest in private Internet start-ups, which has become a boon for businesses like SecondMarket that match buyers and sellers.
The seven-year-old business is a major player in this market. Last year, SecondMarket oversaw $400 million in trades in 40 private companies, according to Mr. Silbert.
In its updated platform, the company is aiming to broaden its base and make its community more social. For the users, qualified investors can now choose to follow companies and friends on the exchange and receive updates on their investments and auctions.
Unlike more traditional social networks, like Twitter, the platform does not support direct messaging and there are high privacy walls. Both users have to agree on a connection and only qualified investors can follow a company’s feed.

SecondMarket is shoring up its inventory, just as the market for private shares is heating up. Although the market for initial public offerings has started to show signs of life, during the downturn many Internet start-ups opted to stay private because of tighter regulations and the weakened economy. With several large Web companies, like Zynga and Groupon, on the sidelines, many investors and employees sought alternative markets to cash out, giving rise to exchanges like 

SecondMarket.
 In the last year, trading has become more frenzied, amid growing interest for elite Web companies. Beyond SecondMarket’s competitors, like Nyppex and SharesPost, Wall Street firms have also created investment vehicles to buy shares in these companies.
At the center of the action is Facebook, the sprawling social network that made up 40 percent of SecondMarket’s trades last year. A block of Facebook shares recently sold for $30 a share on SecondMarket at a valuation near $75 billion (a 50 percent markup over Goldman Sach’s January investment in Facebook).

The flurry of activity can be a headache for the start-ups, which have to track these trades and make sure that their total shareholder count does not hit 500, which would require them to file financial results or go public.
The exuberance has already drawn the scrutiny of regulators, who started looking into the trades of social networking companies like Facebook, Twitter, Zynga and LinkedIn late last year, as was first reported by DealBook.
SecondMarket has acknowledged that it has received information requests from the Securities and Exchange Commission on pooled investment vehicles and is cooperating with regulators.
In its new trading platform, Mr. Silbert said he hoped to create a more transparent structure for the market.

Before any shares are traded, SecondMarket says it will contact every company for approval. The company will also give businesses the power to define the parameters for its trades.
For example, a company can determine the type of investors that are eligible and the structure of the auction process. For investors, SecondMarket will aggregate publicly available data, including filings, on business pages and encourage companies to submit additional financial information.
As SecondMarket expands, there is concern that it is helping to fuel an already overheated market and opening the doors to less viable business. Although Zynga, Facebook and Groupon are churning out significant annual revenue, it’s unlikely that the 12,000 businesses in 
SecondMarket’s expanded universe (the majority of which are technology companies) can boast the same. SecondMarket’s investors must be accredited — meaning they have at least $1 million in assets or an annual salary $200,000 — but Peter Falvey, a managing director at Morgan Keegan, said there’s still not enough information available to help them make prudent decisions.
“It’s hard enough to get information on Facebook,” he said. “I’m an accredited, I have an M.B.A. in finance, how do I know what these things should be valued at?”