December 12, 2011
Is SharesPost a Passive Bulletin Board? It Says It Is...
Posted by Usha Rodrigues

[Last month I blogged about some research my student, Brad Flynt, had done on SharesPost.  I asked Brad to share with us some more thoughts on his research, and this is the first of two posts from him.]

I think the secondary market for private transactions is an incredibly interesting and valuable platform for the exchange of capital.  This research project began when I explored the topic in Professor Rodrigues’ ‘Lifecycle of the Corporation’ class.  At that time, my research was focused on who could purchase Facebook shares, but it slowly developed into a closer look at the actual platform used to exchange shares and research reports on the companies trading on the site. 

When I began my general research on SharesPost, it became clear that there was not much information on the company except that it was selling thousands upon thousands of shares of Facebook, among other companies.  SharesPost says it operates as a ‘passive bulletin board.’   I had a difficult time determining exactly what a passive bulletin board is, since the only mention of it is from a series of SEC no-action letters.   

The key characteristics present in a passive bulletin board seem to be the extent of the issuer involvement, the complexity of the transaction, the compensation structure for the creator of the board, and the presence of Section 12 financial information.  In the case of SharesPost, each of these factors cut against it being a passive bulletin board.

Legal definitions aside, when you visit (and sign-up for the free account), it just does not feel passive.  Among other things, the presence of research reports with precise valuations seems to go beyond the passivity accompanying a simple post to buy or sell.  Open a research report.  Take a look.  They read like a hybrid prospectus/analyst report and are filled with information that should make any buyer or seller more comfortable with the transaction. [UR note: here's an earlier blogpost describing Brad's project last year, with a link to one of these reports]

The next step was determining SharesPost was more correctly defined as a broker-dealer, based upon the GlobalTec factors.  Among others, the relevant factors include whether the company charges fees, holds funds, or recommends/provides investment advice.  SharesPost charges a 3% fee to both buyer and seller, potentially holds funds, and provides research reports to investors.  It thus appears as though SharesPost may be operating as an unregistered broker-dealer. 

This is my first real investigation into a Silicon Valley startup, and it surprised me that a company would go through such significant expense when it was not even sure it was properly operating within the bounds of the current securities framework.  However, the notion that a Silicon Valley company believes it is easier to ask for forgiveness rather than permission is apparently as old as the Valley itself. 

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