Glom readers know I've been thinking a lot about SharesPost, one of two major sites where trading of pre-IPO shares is flourishing.  Secondary markets were in the news twice last week.  First, SharesPost agreed to pay the SEC an $80,000 fine for failing to register as a broker-dealer--which seems like a slap on the wrist, particularly since everyone knew that it was breaking the rules.  Second, the SEC sued two money managers for failing to disclose hidden commissions when trading for their clients on the secondary market.

Descriptions of the secondary market for pre-IPO shares range from "a bit of a free for all" to "an illiquid, opaque bazaar populated by shady characters"   Everyone seems to agree that the Facebook IPO frenzy is fueling a lot of the excitement.  But it seems to me that when Facebook eventually does go public, the SharesPost might catch some flak.  I see two possible scenarios:

Scenario One: Facebook experiences a huge first-day pop, that much-desired wild ride where the shares' initial offering price is outstripped-sometimes wildly outstripped--by the price at the market's close.  A big pop would be good for those lucky enough to buy Facebook at the IPO, and fantastic for those who bought pre-IPO.  Traditionally, this latter group included early employees, friends and family, angel investors, and venture capitalists. Now it also probably includes everyone who bought Facebook on the secondary market.  

So what's the problem?  The risk for SharesPost is that the public sees this as another example of what Reuters terms "special rules for the rich."  Because not just anyone can buy shares on the secondary market.  You need to be an accredited investor--i.e., rich. I could see popular opinion taking this as another case where the rich get access to special deals the rest of us poor schlubs can't, and they make money as a result while we're left on the sideline.  Not good for SharesPost.

Scenario Two: Facebook shares don't pop on the IPO.  They go sideways or even down.  It's not unheard of.  Then what matters is the delta between the price secondary market investors paid and the offering price.  If that gap is high enough, then secondary market buyers will still make a profit.  If it's low--or if some secondary market investors lose money on Facebook (it IS possible, especially when factoring in those commissions), then suddenly buyers will cry foul.  And fraud.  And that's bad for SharesPost, too.

Does anyone else feel like the secondary market right now is like the NYSE in September of 1929? 

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