The Securities and Exchange Commission (SEC) has launched a broad investigation into whether hedge funds and other investors are improperly selling hot private technology stocks amidst a boom in trading of their shares.
In the early stages of the regulatory scrutiny, the SEC is focused on an unusual burst of new activity recently by people selling pre-IPO shares as valuations of private tech companies have exploded and companies have opted to remain private for longer periods of time.
Regulatory scrutiny is being placed on a recent rise in firms selling employee-owned shares of private companies through derivative transactions - something prohibited by some firms. According to the Dodd-Frank Act of 2010, such derivative transactions could represent possible violations. The Act makes it unlawful for most individual investors to trade swaps unless the transaction takes place on a national securities exchange with a registration statement from the SEC.
According to sources, the regulatory probe reflects concerns about activity in the growing private market for tech shares of big, established companies. During the first half of 2015, startups worth more than $1 billion have raised nearly $15.5 billion in additional funds.
Reportedly, many of the derivative transactions are being offered by new companies that have opened within the past six months. Several companies that offer derivative transactions to employees of private tech companies who want to sell their shares, were sent letters from the SEC, requesting details of the transactions. Sources say the SEC is also investigating as to whether 'middlemen' have possibly misled investors about special funds known as 'special purpose vehicles', investments in private tech shares.
Contributed by Millennium Traders
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