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Advance trades may hurt Facebook's IPO investors

SAN FRANCISCO — Facebook is already trading like a public company, as insiders and wealthy investors use private marketplaces to buy and sell stock in the social-networking company ahead of its initial stock offering.

The shareholder base has grown to more than 1,000, compared with the 50 to 100 investors most companies have when they go public, according to an estimate by Sam Hamadeh, head of research firm PrivCo. Private purchases pushed Facebook's valuation past $100 billion this month, possibly limiting immediate gains for IPO investors, given that Facebook may seek a $75 billion to $100 billion value.

"Facebook is a blue-chip stock, and it's not even public yet," said Kevin Landis, portfolio manager for the Firsthand Technology Value Fund in San Jose, Calif. Facebook jumped as high as $44 this month in private trading, valuing the company at $103 billion and leaving it higher than when Landis bought stock at about $30 to $31 in October.

While demand may push the stock even higher when Facebook goes public, private trades through channels such as SecondMarket and SharesPost are already making it possible for employees and venture capitalists to cash out.

Facebook, which filed for an initial share sale this month, has yet to set its price range for the IPO. People with knowledge of the matter said earlier this year that Zuckerberg was weighing a valuation of as much as $100 billion.

The private trading may make Facebook's debut more like a secondary offering, where holders sell stock in an already public company, said Barry Ritholtz, CEO of FusionIQ, an equities research firm in New York.

"The people buying now at the IPO price are presuming there's lots of upside. I'm skeptical," Ritholtz said. "There's a lot of smart money agitating for the highest possible valuation, and they don't necessarily have the investing public's best interest at heart."

Insiders and investors with $1 million of net worth and a salary of more than $200,000 can qualify to buy stock on private marketplaces, according to Securities and Exchange Commission rules. In an auction last week on SharesPost, Facebook stock traded for $42, valuing the company at $98 billion.

Widely traded private companies that held IPOs in 2011 traded at about 25 to 30 percent less than their eventual IPO price in the two months before going public, said Ori Bash, a vice president at Pluris Valuation Advisors. Facebook may see a smaller gain because it has been traded more, owned by larger investors and researched more thoroughly than other private companies, Bash said.

"If these private-market trades are truly reflective of Facebook's valuation, there's a possibility that demand for the IPO shares could drive it even higher than its anticipated $100 billion valuation," Bash said.

Advance trades may hurt Facebook's IPO investors 02/24/12 [Last modified: Friday, February 24, 2012 9:14pm]

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