Regulators Investigate Uber (And Others) Pre-IPO Trading

A new investigation has been launched by Securities and Exchange Commission regulators over whether or not investors are bending the rules when it comes to selling private tech stocks, sources close to the investigation said, The Wall Street Journal reported.

Specifically, the investigation is targeting hedge funds and investors to see if shares are being improperly traded. This is at a time when valuations for startups are rising, and there’s an increase in pre-IPO shares of hot tech companies on the market.

This investigation hasn’t dug deep into the surface yet as its said to be in the early stages, but this most recent probe follows what’s believed to be an uptick in activity related to those sales of pre-IPO shares while those values skyrocket for companies as they remain private.

WSJ‘s report details the SEC probe, which is said to include hedge fund manager Jonathan Sands, who allegedly told other investors he was getting stock “directly” from Uber. That activity was later halted once his legal team advised him to stop such trading behavior. According to the report, Sands had attempted to find investors to support a fund that would be used to invest in Uber stock, but he did not actually have access to those shares, sources indicated. In an email with WSJ, Sands denied that he had committed any wrongdoing when it came to selling Uber shares.

The SEC is also investigating what roles possible “middlemen” have played in helping deceive investors about these types of funds that claim to invest in private shares, the sources told WSJ.

And according to sources WSJ spoke with: “The SEC also is examining a recent rise in firms selling employee-owned shares of private companies through derivative transactions.” This all stems to the SEC’s review of possible violations of the Dodd-Frank Act; that act specifically makes it against the law for investors to trade swaps without involving the SEC.

This specific regulatory probe comes at a time when startups are managing to raise more capital than ever and are getting their hands on additional investors and funds quickly from venture capital firms. That growth, however, creates concern about “activity in the swelling private market for tech shares of big, established companies,” according to WSJ‘s account on the matter. Uber, for instance, has recently grabbed a valuation of close to $50 billion.

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