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No Facebook Trading in the U.S.? Don't Bet on It

Just last week, Goldman Sachs (GS) announced that its deal to make shares of Facebook available would be open to its foreign customers only. And those anxious would-be shareholders invested $1 billion.

But don't think that Facebook shares are as unattainable as the homecoming king and queen. In fact, there's a quiet but relatively brisk trade in them as some current shareholders cash out some of their holdings through other secondary markets.

One of these marketplaces, SecondMarket, specializes in matching buyers and sellers of shares in hot pre-IPO companies. In 2010, the company saw more than $500 million in share transactions. The biggest mover? Facebook. In fact, according to the company's figures, 39 percent of all its completed transactions were for Facebook shares, with LinkedIn a distant second with 7 percent. A Facebook stock auction earlier this month on the site saw a share price of $28.26. (Note that the percentage of transactions isn't necessarily the same as the percentage of money.)

Overall, buyers were venture capital funds, hedge funds, mutual funds, asset managers, secondary direct funds, and high net worth individuals. Because of the well-heeled nature of the buyers, chances are that shares went in relatively large blocks to relatively few buyers, which would reduce the chance of creating the need for a mandatory IPO earlier than the company wishes.

Another secondary market, SharesPost, has also been active in Facebook share trading. Earlier this month, it announced in an email that a sealed bid auction of 362,035 common stock shares had sold for $27.60 each. That's an aggregate sale of nearly $100 million. It suggests a valuation of more than $76 billion for the company.

Even though much attention has been on Goldman, the sale of stock in Facebook (and other pre-IPO companies) has been happening for some time. The question is who actually sells the shares. Last April, Facebook forbid employees from selling shares. That suggests a few potential explanations:

  • Employees are thumbing their noses and selling anyway.
  • Top management is getting some liquidity, and cash, even though regular employees aren't allowed to.
  • Current major investors are converting some shares to invest the proceeds elsewhere.
  • Facebook itself is putting together deals to let employees sell shares in a controlled way.
The first and third choices seem unlikely. Employees would probably not risk their jobs and major investors want their chunks of stock until a real IPO. The last choice also seems unlikely, as Facebook has been unhappy with the use of these secondary markets.

Also, it can arrange block placements for employees with major investors, like the sale to Digital Sky Technologies, though at a lower price than either SecondMarket or SharesPost has seen. And yet, it would be risky for top execs to sell through one of the two and not allow employees to do the say, should word get out.