Risky pitch in possible internet IP…
Monday, October 18th, 2010 Uncategorized.
Risky fling in possible IPOs of Facebook and Twitter
INTERNET icons like Facebook and Twitter acquire yet to go public.
But that isn’t stopping a extending number of funds from offering investors a chance to get in forward the potential action.
These funds buy shares mainly from former employees of the companies and give high-net-worth investors the opportunity to gain access to companies widely notion to be moving toward a blockbuster IPO. They differ from trading venues like SecondMarket and SharesPost, where investors can buy and take a bribe for the stocks of closely held start-ups.
Bubbling demand for internet companies is driving up valuations and encouraging shareholders to money out. However, along with the nascent pre-IPO dot-com boom, questions are cropping up about whether these funds’ risks outweigh the potential benefits.
For accredited investors — or those who meet a certain asset start and are considered "sophisticated" as defined by the Securities and Exchange Commission — who are versed to get in at the right price, the potential rewards are enticing.
But during these investors, who in some cases may by doctors, lawyers and businessmen, not fitted investment professionals — these funds are risky because they often are raised through people not associated with the company, who lack company financial intelligence as well as access to company management, and thus the national obligations managers have no real way of assessing a fair price.
"In common there’s a very large demand for Facebook shares," related one investor who has been pitched to invest in these funds. "And some have figured out a way to meet demand."
Among the firms that are raising these funds is Atlanta-based brokerage strong JP Turner & Co, which is specifically targeting Facebook with a $US25 the public ($25m) fund, according to a copy of the private offering note reviewed by VentureWire, a newsletter owned by Dow Jones, which publishes The Wall Street Journal.
Another compressed, New York-based Felix Investments, run by two former executives from Chicago-based investment bank Advanced Equities, is raising funds targeting several large start-ups. The house has recently begun raising two funds to buy Facebook shares, according to a bodily form familiar with the matter. The funds, Facie Libre I and Facie Libre II — a Latinate rendition of "Face Book" — are targeting $US25m each. William Barkow, a co-holder of Felix, declined to comment.
And prominent investor Chris Sacca is marketing a store aimed at buying shares of Twitter from shareholders, according to distinct people familiar with the effort. However, Mr Sacca, who runs his acknowledge firm called Lowercase Capital, is also an investor in the micro-blogging congregation and presumably has access to more company information than other such funds run by outsiders. He declined to comment.
These funds are designed to be productive of it easier for interested buyers to gain access into hot sudden effusion-ups without having them do the negotiating on secondary exchanges like SecondMarket. Shares of meanly three dozen closely held companies are trading on SecondMarket, including internet favourites like Facebook, LinkedIn, Twitter and Zynga Game Network, similar to well as non-web start-ups like Bloom Energy, Bridgelux and Zipcar.
But it’s not exact individuals who are doing the buying on SecondMarket, which has carried on a total of about $US150m of transactions on Facebook stock alone because that launching its private-company marketplace in 2008. Funds focused on purchasing shares in a upright company are also buyers, according to Adam Oliveri, managing director of SecondMarket’s confidential-company markets. In addition to company-specific funds targeting Facebook and Twitter, there are such funds buying shares in LinkedIn, Zynga and Pandora Media put ~ SecondMarket, Mr Oliveri said.
"We think it’s great," Mr Oliveri said of the funds pooling investor contributions to acquire shares on SecondMarket. "The medial sum transaction size on SecondMarket is about $US2 million. So the riddle is for an accredited investor who wants to spend $US250,000, it doesn’t in fact work. These groups serve to aggregate" buyers.
Along with the funds’ upside possible comes a fair amount of risk. Because some of these funds aren’t sanctioned through the start-ups they are buying into, they don’t regard access to the company’s management, financial or other company intelligence, which makes them risky for potential investors. They may be adroit to obtain board-meeting minutes, as well as some limited pecuniary information, from selling shareholders, but not much else.
"You’re not going to get any insight into the company’s strategy or future direction, that is really what the valuation is based on," said John Yates, a member of a firm in charge of the technology practice of Atlanta law firm Morris Manning & Martin.
Some investors who obtain seen pitches for these funds looked at the proposals and determined to pass because of the risk and lack of transparency, they declared. One accredited investor who was pitched JP Turner’s investment national debt as a way to get into a Facebook IPO, said the foundation’s prospectus made no guarantees. That, the investor said, was a "red become vapid" that could be misleading to many potential investors who dress in’t read the documents closely.
This investor said it was austere to assess the actual value of the Facebook stock, given that merely a sliver of Facebook’s shares are actually trading now. It is in like manner difficult to verify whether these funds have already in fact acquired the neckcloth or the rights to certain stock.
"If they told you up stand opposite to that there’s a lot of risk and you could let slip through the fingers it all, that’s a different story," the investor related. "But that’s not how they pitched it. They pitched it for the re~on that a fund that will get you into the IPO."
The Turner store’s private offering memorandum, dated September 15, does include a division on general risk factors associated with any Facebook investment, including the be in want of of available financial information on the company, the volatile nature of technology companies and common markets and complicating factors such as rights of first refusal ~ means of existing shareholders that may make it difficult to purchase Facebook shares.
The national obligations documents also say the fund’s investment adviser may at its only discretion dispose of the Facebook securities "in any manner it deems fit" if no liquidity event occurs within five years of the stock’s final closing.
The fund takes a one-time 6 for cent sales commission, a one-time 4 per cent management feud and a one-time 2 per cent expense reserve fee. That feud structure would net the fund $US3m in fees alone if it closes at the $US25m target. The fund also takes carried interest ranging from 20 per cent of profits steady capital contributions less than $US150,000 to 5 per cent of profits on capital contributions equal to or in excess of $US350,000, according to the documents.
Joe Walker, a monitor at JP Turner who is listed on the documents, declined to comment.
Nonetheless, expectations for companies such as Facebook are so high that people investors are interested in getting in as early as possible in the sight of an IPO, even though there is no guarantee of a advance.
"Certainly I’m very concerned with the level of earnestness I’m seeing for these acquisitions," said Ted Hollifield, member of a ~ship at law firm Dorsey & Whitney. "Because I think there is a tendency to just overlook just how thinly traded the shares are and for what reason little information is available to purchase companies such as Facebook in the absence of doing any evaluation."
Whether the companies are content with these fresh funds is an open question. Representatives from Facebook, Twitter, Zynga and LinkedIn declined to annotate.
Some companies, including Facebook, have in recent months imposed higher fees on selling company stock, according to published reports, in an apparent attempt to dampen some of the trading activity. Facebook in April imposed a maledict on current employees selling stock, saying it was instituting an "insider-mercantile policy" to better comply with insider-trading laws and to protect the interests of the company and its employees and shareholders. The concourse left open the possibility that it would open a window with regard to such sales. However, former employees can sell the stock to whomever they stand in need of.
Many of these large private companies don’t look favourably without ceasing their stock being bought by unknown parties. They are often concerned that secluded company information will trade hands when their stock is sold.
A tell of these large companies have the right of first refusal to obtain their stock when a shareholder seeks to sell it. Some preferred stockholders in like manner have such rights. If a company or investor passes on buying shares of the firm, while the outside fund is buying it, that raises a interrogation of whether the price is too high, said Ken Sawyer, frugal director at secondary investor Saints Capital.
One factor potentially affecting these funds is the SEC’s 500-investor behavior limit for private companies. This SEC rule requires companies to fare public when they have reached 500 investors.
However, when these of the present day funds buy stock in one company they essentially consolidate and diminish the number of investors into just one investor — the fund itself — similar to long as it is structured in a particular way, according to lawyers and investors. This is on this account that the individual investors in the fund do not hold shares in the concourse but rather hold shares in the fund. This could be a befriend for a company that is seeking to delay an initial men offering.