Report: SEC probes marketing of private shares

Kevin McCoy | USA TODAY

U.S. securities regulators are investigating whether hedge funds and other investors are improperly trading private technology stocks, according to a new report.

An early-stage probe by the Securities and Exchange Commission focuses on share-selling in advance of tech firms' initial public offerings as valuations of early stage and more established tech companies have risen, The Wall Street Journal reported Monday.

The regulator is also reviewing a rise in companies selling employee-owned shares of private firms through derivatives transactions, the report said, citing unidentified people close to the investigation.

Such transactions are sometimes barred by the companies, and they may violate the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

The SEC declined to comment.

The reported investigation follows an SEC enforcement action last month against the Silicon Valley-based Sand Hill Exchange over the company's offering and selling of security-based swaps to retail investors outside national securities exchanges and without required registration statements.

Sand Hill began as entrepreneurs Gerrit Hall and Elaine Ou created an online business that valued private start-up firms in Silicon Valley "along the lines of a fantasy sports league," the SEC said in a June 17 announcement.

However, Sand Hill's business model changed several times, and the company earlier this year "evolved to invite web users to use real money to buy and sell contracts referencing pre-IPO companies and their value," the SEC said.

Sand Hill, Hall and Ou ceased the operation in early April after inquiries by investigators, and the company agreed to pay a $20,000 settlement penalty, the SEC said.

"The Dodd-Frank Act prohibits security-based swaps from being offered in the darkness to retail investors, and we were able to act quickly before any losses materialized in this offering that occurred outside the proper regulatory framework," said Reid Muoio, deputy chief of the SEC's Complex Financial Instruments Unit.