The company research reports available on SharesPost were fascinating. The amount of information in them was incredible. For example, there is a 68-page research report on Facebook dated May 30, 2011 that includes a specific per share valuation of $22.24-22.57 and a market capitalization of an estimated $52.3-53.1 billion. These specific estimates are despite disclaimers that the source of the information was only “believed to be reliable”! This lack of concrete information is amazing to me.
Taking a step back, I do not think these research reports are necessarily bad. Assuming they are reasonably accurate, facilitating the transfer of capital is a good thing. The issue to me is who is creating the reports and what is their incentive. Professor Davidoff’s article addresses that SharesPost is now paying for the research reports. The question then becomes, why are they paying for the reports and what is their incentive?
The principals in SharesPost have created their own broker-dealer in the form of SP Investments Management, LLC, a “wholly owned subsidiary of SharesPost, Inc.” It is not exactly clear what SP Investments Managements’ role in the transaction is and where they are making money. If SP Investments Management’s revenue is in any way tied to procuring shares of Facebook at the lowest price possible, there seems to be a clear conflict of interest. The issue is that this relationship is not disclosed.
Additionally, there is another potential conflict of interest between SharesPost, GSV Capital Corp (NASDAQ: GSVC), and Candlestick Advisors. GSVC is a fund created for the sole purpose of purchasing pre-IPO shares through platforms such as SharesPost. In fact, Michael Moe, the creator of the GSVC fund, is on the SharesPost board. Candlestick Advisors is a supposedly independent, third-party creator of research reports for SharesPost. But the GSVC logo is on the Candlestick research reports, thus leading me to question what sort of influence GSVC might have on them. What is not specifically addressed is whether GSVC or an affiliate pays Candlestick for producing the reports. That is the key. Is GSVC paying Candlestick to produce reports pricing shares below market value so GSVC can purchase at a lower price? If so, anyone selling shares of Facebook on SharesPost has been misled.
The bottom line is that there might not be anything more than lousy disclosure in this case. In fact, I believe that is the most likely scenario and all of these players are all operating legitimately. And to be clear, my research paper does not accuse anyone of actual wrongdoing. It simply addresses the possibility of market manipulation and suggests the need for more transparent disclosure.
The takeaway here is that the potential for fraud is so great because there is the possibility of making large sums of money. This is not some Mom-n-Pop operation. This is Facebook. Hundreds of thousands of shares are exchanging hands at over $30/share, meaning hundreds of millions of dollars are at stake. It’s scary to think how in the dark everyone really is.
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