The Velvet Rope

Operators of private stock exchanges want accredited investors to think they can buy into future IPOs of Twitter and LinkedIn early and freely, but that is no longer the case. Private companies coveted by institutional investors and individuals alike are increasingly putting strict limitations on who can buy their shares, according to sources who spoke with peHUB.

Twitter, for example, has a list of approved stockholders, and if an investor is not on it, that rules out virtually any opportunity of buying into the micro-messaging site pre-IPO. Most existing shareholders are required to deal only with other existing investors, which are approved by Twitter. The company is not approving new shareholders. There are just a few dozen approved buyers, one source said, who spoke on the condition of anonymity and declined to identify other entities that have Twitter’s approval to buy stakes via secondary stock purchases.

“People who own shares of Twitter know they can’t sell them [to unapproved investors] on SharesPost,” said the investor, who was directly made aware of the company’s policy regarding secondary share transactions.

Neither can LinkedIn’s private stockholders, said David Weir, CEO of SharesPost. He tells peHUB that, as part of the bulletin board page belonging to each company monitored and traded through SharesPost, LinkedIn restricts “who sellers can sell to,” adding that bidders for the company’s shares “must be existing shareholders.”

A representative for LinkedIn said the company does not “prohibit shareholders from selling to certain parties, but we do have first right of refusal on every sale, which we can exercise… based on the best interests of the company, its shareholders and our employees.”

Facebook, Weir added, does not have a policy on SharesPost that requires sellers only sell to existing stockholders. However, the company still has the option to reject new investors’ attempts to buy stock.

Other private companies have recently been huddling with attorneys to draft plans that help them maintain better control of their shareholder bases, which were unexpectedly altered when private stock transactions surged, said one legal expert. Their struggles with issues created by private stock exchanges have been repeatedly highlighted: Facebook recently terminated an employee over private stock purchases—who did so, reportedly, in violation of internal policy. Also, the Securities and Exchange Commission has sought information from other companies pertaining to share trading activity, including Twitter and LinkedIn. And Abu Dhabi-based Alpha Investment sued Zynga after the online gaming company denied the investor an opportunity to buy a former employee’s shares. Zynga reportedly contacted the trading firm brokering the share sale and had the transaction terminated.

It is expected that most start-ups will not fight against having shares traded on secondary marketplaces because sites like SharesPost and SecondMarket have provided positive investor interest, increased visibility and, perhaps, a boost in valuations to start-ups and their VC backers, sources concede.

A representative for SecondMarket declined to offer specifics on the private stock marketplace’s interaction with specific companies. SecondMarket was brokering Twitter stake sales as recently as the first quarter of 2011. Twitter did not respond to multiple requests for comment for this story.