On March 14, 2012, the SEC announced that it had filed a complaint in federal court in San Francisco and an Administrative Proceeding relating to private investment funds which were established to acquire the shares of Facebook and other Silicon Valley firms which were privately-held. The Commission's charges included allegations that investors were misled and the funds and their managers pocketed undisclosed fees and commissions. According to the Commission, the fund managers raised more than $70 million from investors. The Commission also brought an Administrative Proceeding against an online service that matched buyers and sellers of pre-IPO stock, charging the entity with engaging in securities transactions without registering as a broker-dealer. The cases appear to be the first of their kind relating to the purchase of shares in the pre-IPO market.

In the federal court case, SEC v. Mazzola, the Commission sued Frank Mazzola and two of his firms, Felix Investments LLC, and Facie Libre Management Associates LLC, for making false statements to investors. The Commission alleged that the defendants "created, marketed, and managed a number of limited liability companies designed to pool investors' funds to invest in pre-IPO companies like Facebook, Inc. ('Facebook'), Twitter, Inc. ('Twitter'), and Zynga Inc. ('Zynga')." The Commission further alleged that defendants:

  • earned secret commissions (above the 5% disclosed in offering materials) for the funds' purchases of Facebook stock;
  • sold interests in the Facie Libre funds without disclosing that that the funds lacked ownership of certain Facebook shares;
  • misled an investor regarding a Felix fund's acquisition of stock of Zynga (the fund had not acquired any); and
  •  made false representations regarding Twitter’s revenue to attract investors to their Twitter fund.

The SEC seeks to enjoin the defendants from future securities fraud, as well as an order disgorging their ill-gotten gains and requiring the payment of financial penalties.

The SEC filed an Administrative Proceeding against Laurence Albukerk and his firm, EB Financial Group LLC. Mr. Albukerk told investors in offering materials that he would charge them a 5% fee for an initial investment in a Facebook fund, and a 5% fee when the shares were distributed to investors following a Facebook IPO. Mr. Albukerk did not tell investors that he was using an entity controlled by his wife to purchase Facebook stock and then buying interests in that entity for the EB Funds and charging investors a mark-up. Without admitting or denying the SEC’s findings, Mr. Albukerk and EB Financial settled with the Commission without admitting or denying the allegations, and consented to an order finding violations Section 17(a)(2) of the Securities Act and Section 206(4) of the Investment Advisers Act (as well as and Rule 206(4)-8 thereunder). Mr. Albukerk and his fund agreed to pay disgorgement and prejudgment interest of $210,499 and a penalty of $100,000.

The SEC also filed an Administrative Proceeding against SharesPost Inc. and its CEO, Greg Brogger. According to the Commission "SharesPost held itself out to the public as an online service to help match buyers and sellers of pre-IPO stock and allowed registered representatives of other broker-dealers to hold themselves out as SharesPost employees and earn commissions on transactions they facilitated through the SharesPost platform." SharesPost and those broker-dealers created a commission pool that was distributed to representatives of the broker-dealers. In addition, the Commission claimed that SharesPost collected and published information concerning issuers' financial metrics, research reports, and a valuation index. Moreover, the Commission asserted that the SharesPost platform was used to create an auction process to buy stock in pre-IPO companies. The SEC charged SharesPost with engaging in securities transactions without registering as a broker-dealer (and Mr. Brogger was charged with having caused the violation). The two consented to an SEC order and agreed to pay penalties of $80,000 (by SharesPost) and $20,000 (by Mr. Brogger).

Robert Khuzami, the SEC's Director of Enforcement stated that the SEC "applaud[ed] innovation in the capital markets," but warned that "new platforms and products must obey the rules and ensure … basic fairness and disclosure … ." The Commission explained that the charges in these matters were made following a year-long investigation "of the fast-growing business of trading pre-IPO shares on the secondary market." Tom Gorman of the SECActions.com blog has an interesting discussion of the case here.