Special Purpose Investment Vehicles Snap Up Facebook Shares

A new type of player is emerging in the market for Facebook shares.

Investors are banding together and creating a growing number of entities that exist solely to buy stock in the company. While investors have been able to purchase shares from former employees for the past few years, these funds underscore ballooning interest in Facebook after it surpassed 500 million users this year. It also has shown off increasingly established revenue streams, including brand and performance advertising, and its virtual currency, Credits.

In the private market for Facebook stock, sellers typically want to offload several hundred thousand dollars to more than $1 million in Facebook shares at a time. So smaller investors will join together, pooling amounts of between $25,000 to a few hundred thousand dollars in order to buy them.

“A manager will put together a limited liability corporation, look for a large block of shares, then raise the money to purchase them from smaller investors who wouldn’t meet the individual trade size,” said Greg Brogger, the chief executive of SharesPost, a site where buyers and sellers can list public offers for the stock. “The LLC will aggregate the investment and write a single check.”

Dubbed special purpose vehicles or issuer-specific funds, they are usually formed by private wealth management groups, institutional investors, investment banks or people who are already well-connected to the company’s leadership.

These entities are counted as single shareholders, so they help Facebook skirt the the sensitive 500 shareholder limit at which the Securities and Exchange Commission begins requiring companies to make more extensive financial disclosures, according to Mark Murphy, who heads public affairs at SecondMarket, a New York-based online marketplace for alternative assets.

Boaz Rahav, a general partner at newly formed GreenCrest Capital, is putting together a fund to buy $100 million in Facebook shares on behalf of institutional investors. He says the firm has cultivated relationships with a number of former Facebook employees based on the West Coast that want to sell part of their holdings.

“There is a large group of senior former Facebook employees — some of whom are relatively young — that are sitting on warrants or shares that appreciated ten or twenty-fold over the last 18-24 months,” he said. “We have a unique access point to large blocks of shares.”

The minimum investment is $250,000. Then, Greencrest charges an initial 5 percent entrance fee, and a 20 percent carry on the profits if investors have a return of greater than 20 percent. He wouldn’t specify the price Greencrest is buying the shares at, except to say that it’s a range the firm has been monitoring daily. Rahav says the firm doesn’t have special access to Facebook’s financial statements so investors need to do their own due diligence.

In a prospectus for another $40 million Facebook-specific fund that we saw, investors were asked to put down at least $100,000 each.

Special-purpose vehicles for Facebook shares started to appear in 2008, according to Adam Oliveri, who heads private company markets at SecondMarket. But they’ve grown in prominence over the past year as investor demand for the social network’s shares have driven its implied valuation to around $56.7 billion, according to the most recently completed trade on SharesPost. (Keep in mind that beyond Facebook’s success, scarcity is also driving up the valuation. There are few eligible sellers because current Facebook employees are banned from selling their holdings, and because most of Facebook’s newer employees have restricted stock units or RSUs, which are non-transferrable.)

The new issuer-specific funds are still outnumbered by hedge funds with broader portfolios by 10 to 1, Oliveri said. But they indicate intense interest in a company that may come forward for an initial public offering in a few years.

“When we first started trading Facebook stock, it took us about two months to find an appropriate buyer and negotiate the transaction, price, and get an appropriate purchase and sale agreement,” Oliveri said. “Today, that entire process takes two hours.”

Rahav said he believes Facebook would be accepting of firms like Greencrest since they help the company avoid pushing the number of shareholders close to the SEC limits.

“We’re many sellers under one roof,” he said. “We think that Facebook will welcome players like us that have an institutional modus operandi and aggregate the buyers for them.” Both Facebook and the company’s legal counsel at Fenwick & West declined to comment.

Because of these sensitive limits, Facebook has employees who, among other duties, are responsible for monitoring the secondary market. It also has helped early employees sell shares and diversify their holdings by facilitating special transactions with Russian investment firm Digital Sky Technologies. DST was favored, in part, because it was already an existing shareholder.

“Facebook has become a great deal more hands-on with the secondary market,” Oliveri said. “They certain require certain purchase and sale agreements and they’ve updated their company governing documents and bylaws to take the secondary market into account.”

Those changes include forbidding non-original shareholders from reselling their holdings without the company’s approval and requiring a $2,500 fee to cover administrative costs of a sale.