Facebook, Twitter Valuations Fuel Trading Surge to $7 Billion

Trading of privately held companies such as Facebook Inc. is likely to surge 51 percent to almost $7 billion this year, drawing new exchanges such as Xpert Financial Inc. and Gate Technologies LLC to vie for commissions.

Xpert and Gate will be competing with SecondMarket Inc. and SharesPost Inc., which gained popularity last year as investors poured billions of dollars into Facebook, Twitter Inc. and Groupon Inc. The value of the transactions may almost triple to $6.9 billion in 2011 from $2.4 billion in 2009, according to Nyppex LLC, a New York research and advisory services firm.

Investors flocked to the secondary market last year to seek growth after a two-year slump in initial public offerings and a half decade of muted gains in the Dow Jones Industrial Average and Standard & Poor’s 500 Index. With fees of about 3 percent a transaction, these exchanges are vying for upwards of $200 million in sales this year, a number that may grow as more technology startups stay private longer.

“There’s an enormous need for liquidity,” said Mona DeFrawi, who’s worked with the venture capital industry for more than 20 years and recently founded Equidity Inc., a Woodside, California, startup that helps investors build relationships with pre-IPO and newly public companies. “There’s a ton of value that’s being created and none of that is appearing in the Dow Jones or S&P 500.”

Xpert and Gate are trying to automate the process, so they work more like public stock exchanges and require fewer phone calls and e-mails to brokers.

Government Oversight?

For the exchanges to succeed, they may have to deal with increased regulatory scrutiny. New York-based SecondMarket said last month that the U.S. Securities and Exchange Commission asked for information on investment funds that are pooling together shares of companies like Facebook.

Private companies with fewer than 500 shareholders aren’t required to disclose financial data, so buyers on SecondMarket and SharesPost often don’t know key figures like revenue, profit, cash flow and debt obligations. Venture firms, by contrast, make direct investments into startups after extensive analysis and meetings with management. Regulators may start to clamp down, said venture capitalist Maha Ibrahim.

“Given restrictions around public markets and public shares, you have to make sure information rights are being shared,” said Ibrahim, a partner at Menlo Park, California-based Canaan Partners. The SEC “should get involved at some level.”