Research Handbooks in Corporate Law and Governance series
Edited by Stephen M. Bainbridge
Chapter 6: The Facebook effect: secondary markets and insider trading in today’s startup environment
The ubiquitous social networking company Facebook made headlines in the spring of 2011 when it fired a widely respected senior manager because he violated the firm’s insider trading policy. The dismissal was controversial not only because it surprised Silicon Valley and led many there to rush to the executive’s defense, but also because it opened up a new chapter in a long-running policy debate about the nature of insider trading. The debate revealed a good deal of confusion about the legality and significance of insider transactions. One leading technology sector blog even went so far as to quote unnamed sources in a post on the matter stating—inaccurately—that insider trading was legal as long as it took place in the shares of a private company. Beyond the issue of insider trading, however, the incident raised concerns about the emergence of new private capital markets such as Shares Post and SecondMarket, where prior to their initial public offerings (IPOs) the securities of high-flying companies such as Facebook, Yelp, Zynga, and Groupon could be bought and sold with relative ease without the need to make the kinds of disclosure required of publicly traded companies. The trades that the Facebook executive made were allegedly carried out on such a private trading platform.
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