A red-hot trading market has developed in the shares of the world's leading social-networking companies: Facebook Inc., Twitter Inc., Zynga Inc., and LinkedIn. What is unusual is that none of the companies is listed on a public stock exchange. Each is privately held.
Now, the U.S. Securities and Exchange Commission wants to learn more about the business of these stock trades.
It is unclear exactly what has piqued the agency's interest. An SEC spokesman declined to comment on the matter. But the SEC's interest comes as a crop of new exchanges is popping up to facilitate these trades.
Over the last year, several private exchanges have matched up buyers and sellers of shares in these fast-growing companies. Though the volume remains thin, the number of transactions is increasing each month.
At the same time, Wall Street brokerage firms have begun forming investment pools to buy these companies' shares.
Businesses such as Facebook, the social-networking leader, and Zynga, a popular maker of online games, already generate hundreds of millions of dollars in revenue. Twitter has more than 150 million users, and just received $200 million in venture financing. LinkedIn, another social-networking site, has become a Facebook for professionals.
Who is selling these shares?
Much of the supply comes from former employees at these companies and their early stage venture capital investors looking to exit their stakes.
The buyers in these so-called secondary trading markets are mostly wealthy speculators looking to snag a piece of the next Apple Inc., Microsoft Corp., or Google Inc. before the rest of the investing public can.
Part of what is driving this emerging market is the shifting dynamics of initial public offerings on Wall Street, particularly in the technology sector, as companies take longer to tap the public markets.
''We are providing a growing need," said David Weir, the chief executive of SharesPost, an online marketplace for private investments started last year that now has 33,000 registered members.
SecondMarket, the leading trading exchange handling transactions in these securities, is expected to execute about $400 million in trades across about 40 private companies this year, roughly a fourfold increase over 2009, the first year it began making markets in the companies, according to a company spokesman.
Facebook, run by Mark Zuckerberg, is SecondMarket's most actively traded company. Last month, SecondMarket held an auction in which approximately $40 million worth of Facebook shares changed hands.
As the volume has picked up, the worth of these nonpublic companies has ratcheted up as well. The combined value of the top 11 private venture-backed technology businesses has increased by 54 percent since June, according to a recent study by Nyppex, a brokerage firm that facilitates trading in private companies.
Facebook is now trading at an implied valuation of $42.4 billion, according to SharesPost, more than tripling in value from earlier in the year. Twitter is worth $3.6 billion, more than doubling over the last several months.
It is uncertain what exactly the SEC is looking into, but several securities lawyers say it could relate to understanding the number of shareholders at these companies.
That would be relevant to regulators because Facebook and other start-ups have a reason to keep the number of shareholders to under 499. If they had 500 shareholders, SEC rules would force them to disclose their financial results to the public.
The pooled vehicles being set up to acquire Facebook stock, for instance, could push the company's shareholder count above 499 if the SEC counted the number of investors in the funds.