Barry Silbert was born to trade.

By age 10, he was swapping baseball cards at collectors’ conventions. At 15, he plowed his savings into shares of Chromatics Color Sciences International — a penny stock that lost him $2,000. And as a 25-year-old banker for the creditors of Enron, Silbert traveled the globe after the firm’s 2001 bankruptcy, flogging Enron assets, including fiber-optic cable and Bolivian pipelines.

He’s been a registered broker since he was 17. Today, Silbert, 34, is the best-known player in a sizzling market: the trading of shares of private, venture-backed social media companies such as Facebook, LinkedIn and Twitter. As chief executive of New York-based SecondMarket Holdings, he is building the go-to forum for trading these boldfaced shares, some of whose prices more than doubled in the 12 months ended in mid-April.

Those rising stock valuations are turbocharging SecondMarket — and making Silbert rich. SecondMarket says it’s the world’s biggest broker of venture-backed private-company stock by the value of shares traded. The firm’s private-company transactions, which totaled $100 million in 2009, quadrupled by 2010 to $400 million.

Based on first-quarter results, SecondMarket could broker $1 billion in private-company shares in 2011, taking fees of from 3 to 5 percent on each trade.

Last year, prominent Asian investors bought a 10 percent stake in the firm for $15 million, valuing Silbert’s 35 percent stake at $52.5 million.

Changing the world

Silbert, who grew up in Gaithersburg, wears his sandy-blond hair brushed forward — and looks 10 years younger than his age.

“I was the kid mowing lawns; I was the kid shoveling driveways,” he recalls. Silbert would turn a profit trading baseball cards with grown-ups 10 years older at hobbyist conventions. “That was my first illiquid asset,” he says.

In 1986, Silbert’s father, a government auditor, died from an aneurysm, and Silbert pursued his odd jobs with even more determination, says his mother, Andrea Epstein. He worked in a liquor store and sold greeting cards.

“It was us against the world,” she says.

Today, like a lot of tech-driven entrepreneurs, he is certain his venture is changing the world.

“The money that we are freeing up is being reinvested in other venture-backed startups — and creating jobs,” Silbert says. “This market we’re building is critical to the whole capital-formation process.”

The shares of private companies have become a hot market — and a hot topic. The value of all private-share transactions was $4.6 billion in 2010, up from $2.4 billion in 2009, according to Nyppex, a broker-dealer and research firm based in Rye Brook, N.Y. The volume, the firm says, could climb to almost $7 billion this year. Silbert says much of that is coming SecondMarket’s way.

“We’ve heard expressions of interest from holders of stocks in thousands of private companies,” he says.

Hot properties

Investors are eager to get their hands on the private stock of such companies as Facebook and Twitter in anticipation of big profits when they go public, and investment banks are scrambling to offer their clients the chance to buy in. Yet the shares trade in a sometimes opaque market that is open only to a relatively privileged class.

In January, Goldman Sachs withdrew the U.S. portion of an offer to sell $1 billion in Facebook shares to clients because the media attention surrounding the offering “might not be consistent” with securities laws. Goldman, which had itself invested in the company, then sold the $1 billion Facebook stake to non-U.S. clients, giving the company an implied valuation of $50 billion.

Some Securities and Exchange Commission strictures may ease soon. On April 6, SEC Chairman Mary Schapiro, in a 26-page letter responding to an inquiry from Rep. Darrell Issa (R-Calif.), said she was considering raising from 499 the number of shareholders a private company can have without making financial disclosures to the commission. Such a change could increase the market for private shares by broadening the pool of potential investors in any one company.

SEC inquiry

The SEC also sent a letter of inquiry to private-share brokers, including SecondMarket, regarding pooled investment funds that sink money into private-company shares, SecondMarket spokesman Mark Murphy says. David Weir, CEO of SecondMarket rival SharesPost, says his company also received a request for documents. Although Silbert owns stakes in a half-dozen Internet startups, none trade on SecondMarket, he says.

The regulators have yet to address what some analysts see as the fundamental issue: allowing private-company shares to trade in quasi-public markets without full disclosure. John Coffee, a professor of securities law at Columbia University, says participants in the private-share market face “informational asymmetries” — meaning that insiders in private companies are likely know more about corporate performance than outsiders buying in.

Silbert says his clients know they are taking chances.

“Institutional investors are sophisticated and understand the risks,” he says.

SecondMarket’s most serious competitor is SharesPost. Other rivals include Gate Technologies and Xpert Financial. Investment banks also buy and sell private-company shares for their clients, sometimes via SecondMarket. Venture-capital firms that want to buy or sell shares often use SecondMarket or its competitors.

How much financial information do companies whose shares trade on SecondMarket have to disclose? As much or as little as they want. SecondMarket provides its customers only the financial data that firms are willing to provide.

‘Dearth of information’

“There’s a real dearth of information about these companies,” says Larry Tabb, CEO of Tabb Group, a capital-markets research firm. “Are investors trading blind? With illiquid securities, you almost have to be.”

SecondMarket is booming partly because fast-growth tech companies are shying away from initial public offerings. According to the National Venture Capital Association Yearbook 2011, there were 72 venture-backed IPOs in 2010, compared with 271 in 1999.

Two reasons are the financial disclosure and additional accounting required under the Sarbanes-Oxley Act, passed after the accounting scandals of 2000 to 2002, says Alan Patricof, founder of venture firm Greycroft. In addition, many of the smaller investment banks that used to underwrite tech IPOs have been bought by larger institutions.

Accredited investors only

The Securities Act of 1933 restricts purchases of private-company stock to “accredited” investors. In the case of individuals, that means people with a net worth of at least $1 million or $200,000 in annual income. In Coffee’s view, inflation has made the standards less meaningful.

“It allows the middle class to enter into a dangerous world of limited information and fluctuating liquidity,” he says.

Silbert characterizes SecondMarket as an eBay for illiquid assets. Companies may opt for open trading in their shares or for quarterly or annual offerings. Most trading is initiated via phone or the firm’s Web site. The sellers are usually former employees and early-stage venture capitalists. The buyers are hedge funds, wealthy investors and other VCs.

Sellers can post their offering price and the number of shares they are selling. Buyers either agree to that price, make lower bids or use the site to set up meetings to negotiate offline. Companies publish whatever financial information they’re willing to disclose on a secure section of the Web site to which only participants in a transaction have access.

Silbert wants to move beyond the eBay model by adding social-networking functions. Participants can list their holdings, post strategies and create watch lists of those companies they’re interested in.

Coffee says markets like Silbert’s look better than they work.

“These private secondary markets give the illusion, but not the reality, of liquidity,” he says. “They are matching systems, and the broker does not function as a dealer committing its own capital. In a period of market distress, liquidity will vanish.”

Even today, days or weeks can go by without shares of even big private-company stocks changing hands.

A look at Facebook trades published by SecondMarket competitor SharesPost shows that private shares are a market of which buyers should beware. In January, investors agreed to trade a small lot of Facebook stock for $60 a share, more than twice the price that other investors agreed to pay the very same day. SharesPost CEO Weir says his company’s brokers now review price postings before they go live.

SecondMarket doesn’t disclose the price at which shares are bought and sold on its network.

Silbert trades more than just the shares of startups. The broker-dealer has staked out a slew of other tough-to-trade asset classes in which it matches buyers and sellers, among them bankruptcy claims, mortgage-backed securities and limited partnerships in hedge funds.

One new customer is Pacific Investment Management Co., a subsidiary of Munich-based Allianz, with $1.24 trillion in assets under management as of December. Pimco shares can be traded only by employees of the Newport Beach, Calif.-based firm, which uses shares as performance-based compensation. SecondMarket is also targeting the private shares of big companies such as Cargill and Levi Strauss.

“We’re scratching the surface of what we can do,” Silbert says.

A growing network

In late 2007, a former Facebook employee approached the firm and asked whether it could help unload some shares. A separate private-company desk was created in April 2009. As of March, Facebook shares, which trade at weekly auctions, accounted for more than 40 percent of SecondMarket’s private- company transactions. In March, its Web-based network for traders of all of its asset classes had 53,000 registered participants, up from 35,000 in 2010, 6,500 in 2009 and 2,500 in 2008.

Facebook spokesman Jonathan Thaw says the company, co-founded and run by Mark Zuckerberg, effectively bans current employees from trading its stock.

“We implemented an insider-trading policy last year to better comply with insider-trading laws and to protect the interests of the company and its employees,” he says.

Private gaming company Zynga also forbids its employees from selling, except during designated trading windows.

“This policy is in place because employees have information about the company that’s not publicly available and might expose them to the risk of insider trading,” says Karyn Smith, Zynga’s deputy general counsel.

Silbert swiped a page or two from Facebook’s game plan in March, when SecondMarket vastly expanded its Web site. While investors could trade in just 50 stocks as of mid-April, SecondMarket also profiles on its Web site thousands of other private companies whose shares might trade in the future. That number is now 12,500, up from 550.

Participants flag those companies they want to keep tabs on, giving SecondMarket a crowd-sourced barometer of the interest in each firm. Site registrants can also state their willingness to buy shares — giving SecondMarket a tool with which to persuade companies to allow their stock to trade on its network.

Seller’s market

In April, Facebook had 3,030 “watchers”; Twitter, 1,772; and Groupon, 1,617. Facebook had just 18 “holders” listed; Twitter, zero; and Groupon, 3.

It’s a seller’s market.

Silbert’s growing customer base has tracked the soaring price of Facebook stock. Buyers and sellers signed off on a trade of $10 a share in April 2010, implying a valuation of $22.7 billion, according to SharesPost. By mid-April of this year, the price had risen to $32.50 a share, or $73.7 billion — more than the real-world market capitalization of eBay or 3M.

By that measure, the overseas Goldman clients who paid $1 billion for Facebook shares in January earned a 47 percent paper return in three months.

Lou Kerner, an analyst at Los Angeles-based investment bank Wedbush, estimates that Facebook’s earnings before interest, taxes, depreciation and amortization (EBIDTA) were $1 billion in 2010 on revenue of $2 billion. Using a higher implied valuation than SharesPost, he concludes that in mid-April, its stock was trading at 78 times its EBIDTA. Bloomberg data showed Google and eBay trading for about 14 times their EBIDTA.

“People aren’t buying Facebook for its revenues in 2010,” Kerner says. “They’re buying it for what it’s going to be doing in 2015. We believe if it were public, it would be worth in excess of $100 billion.”

Other social media companies whose shares SecondMarket trades are also ablaze. SharesPost says prospective buyers and sellers of preferred shares of Twitter settled on a per-share price of $30 in March, up from $11.67 in April 2010.

In December, Chicago-based Groupon turned down a $6 billion buyout offer from Google, the Mountain View, Calif.-based search engine giant. Groupon, which sells coupons for goods and services after negotiating big discounts from merchants, is considering a public offering that values the company at as much as $25 billion, two people familiar with the matter said in March.

Investors using SecondMarket and SharesPost to load up on venture-backed private-company shares are taking a leap of faith, says Stephen Grant, a private-equity banker at Internet Securities.

“There are no fundamentals, just a couple of P&L figures,” Grant says. Still, he says there’s a logic to the clamor. “What people are buying is Facebook’s 600 million active users,” he says. “They are heading toward a billion, and that’s one-seventh of the world’s population as your customer base.”

Silbert says his role isn’t to judge whether social-networking stocks are a bubble — though he points out that plenty trade for far lower valuations than Facebook. “It’s not up to us to determine what the fair market value is,” he says.

His mission, instead, is to get private companies comfortable with the idea of trading their shares. Silbert lets each listing company decide how often its stock can trade, whether employees can buy or sell and whether institutions such as hedge funds are allowed to buy. His 3 to 5 percent fee is split evenly between buyer and seller.

A SecondMarket registered broker called a market specialist vets the buyer to make sure he or she is accredited and meets with the approval of the issuer, which almost always has a right of first refusal on share transfers. A separate operations specialist ensures compliance with anti-fraud and money-laundering regulations. The broker shepherds everyone through the legal and accounting paperwork, ultimately overseeing the settlement of the transaction.

“SecondMarket has been the leader in standardizing the process — the vetting, the lawyering,” says William Martin, founder of Raging Capital Management, a $125 million hedge fund that has used SecondMarket to buy social-media stock, including Facebook.

Matching game

Silbert’s success at matching buyers and sellers has made SecondMarket’s own private shares valuable. In February 2010, Singapore’s sovereign-wealth fund Temasek Holding Pte and Hong Kong-based Li Ka-shing Foundation, which helped bankroll Facebook, together bought a combined 10 percent stake in SecondMarket for $15 million, valuing the company at $150 million.

“SecondMarket fits into our theme of investing in emerging champions,” says Ang Pen Huat of Temasek.

Trading private-company shares remains a relatively small business. SecondMarket produced revenue of $16 million on the $400 million of private-company transactions it handled in 2010. Even if the transaction value surges to $1 billion, private-company trades would generate only $40 million in revenue.

“This is not a big asset class,” says managing director Hans Swildens of Industry Ventures, an investment firm. “It has been a niche business and will continue to be a niche business.”

Silbert says there is room for growth. “Three thousand companies are funded by VCs every year,” he says.

A full version of this story appears in the June edition of Bloomberg Markets magazine.

A rapid rise

Though data can be sketchy, recent trades show that the values of some private companies have surged.

Percentage increase
in implied market valuation


Facebook, up to $73.7 billion in April 2011, from $5.4 billion in August 2009


LinkedIn, up to $2.8 billion in March 2011, from $1.1 billion in July 2009


Twitter, up to $7.3 billion* in March 2011, from $2.8 billion in April 2010

NOTE: Implied market valuation is based on contracts for trades that may not have closed.
*Based on series A, B and C preferred shares.

SOURCE: SharesPost