Meet My Departed Grandma, Fledgling Facebook Investor

My dear grandmother passed away almost 20 years ago. Last week she was on the Silicon Valley fast track, cleared to join the buying frenzy for Facebook shares that has driven up the company's valuation to $75 billion.

By all accounts, dead people don't trade. But that didn't stop the folks at SharesPost—one of the hot new markets for buying and selling nonpublic technology companies—from certifying my grandmother as an "accredited investor."

Relying on erroneous information that I, as a test, submitted under her name, SharesPost let Grandma into its realm, where only sophisticated individuals and institutions are supposed to swap shares, according to Securities and Exchange Commission rules.

The site requires that users designate themselves as what the SEC calls "accredited investors," with financial assets of at least $1 million or annual family income of greater than $300,000. These thresholds were set in 1982, when just over 1% of U.S. households qualified. Those figures haven't been reset for inflation, which means that nearly 7% of U.S. households are now free to dabble.

WSJ's Dennis Berman explains to Evan Newmark how his grandmother -- who passed away almost 20 years ago -- was cleared to join the buying frenzy for Facebook shares that has driven up its valuation to $75 billion.

Buyers are left to certify their own credentials—truthful or otherwise—which could affect the perception of these marketplaces' overall reliability. To SharesPost's credit, it suspended Grandma's access after it realized I was the one calling and asking questions under someone else's name. Clearly, I was not a 107-year-old woman seeking an angle on Facebook.

"If somebody is committed to misrepresenting themselves in a fraudulent way, it's hard to stop that," said SharesPost Chief Executive David Weir. "But we have a pretty high standard for processing them, and it works 99% of the time."

There is good reason for this velvet rope: There is precious little operating information on private companies such as Facebook, Twitter, and Zynga, making trading especially prone to insiders' whims. Prices can swing on just a few trades. On SharesPost, the best buy offer for eHarmony shares was priced 70% below that best sell offer for the shares.

Many in Silicon Valley and Washington regard SharesPost and rival SecondMarket as small saviors of American capitalism. These markets give young companies and their employees new ways to raise capital or sell private stock without the arduous financial and legal disclosure of fully public companies.

SEC boss Mary Schapiro seems conflicted about these new markets' purpose. The agency is investigating potential abuses in these secondary markets, including conflicts of interest and insider trading. Yet, at the same time, Ms. Schapiro is also considering loosening the laws to allow more fund-raising over the Internet.

Of course, players in these companies' shares couldn't care less about the intricacies of market regulation. A few have made small fortunes, cleverly snapping up shares of companies like Facebook and Groupon and riding into the sunset. Last week Grandma and I joined their ranks, spending a few days loitering, testing and playing in these private markets.

For all the hype and worry, I found the markets were far from threats to modern capitalism. They were something worse. They were boring—full of promise but void of much action.

Don't expect an easy, "one-click buying" of Facebook shares. It is actually quite difficult to make a trade, involving a shuffling of contracts, approvals and escrow accounts. On SecondMarket, for instance, buying Facebook shares requires a five-step, week-long process.

The numbers of buyers and sellers remain fitfully small. On SharesPost's bulletin board for Groupon—which also allowed me passage with a few financial fibs—users gripe about how hard it is to find shares. Across the site, real trades remain rare, with listings showing trades that grew stale months ago. On Zynga's listing page, for instance, more than 500 potential investors are "watching" for shares. None own any.

Remember, this was the trading for some of the most visible new companies on Earth. There are hundreds of smaller, more risky ventures for which SharesPost and SecondMarket hope to create a new, Web-powered, market. Anyone hoping to scoop up shares of tiny company Fangager.com?

The whole experience brought back the gnawing feeling of boom times of the past, of frolicking sock puppets and $50 billion LBOs. In these times, rich valuations are supported by other rich valuations and the whole market marches ever higher. Then it doesn't anymore.

SharesPost's Mr. Weir said the company is "serving a real set of needs, for private investors that need liquidity and companies that need growth capital." In the first quarter, SharesPost helped bring together 250 transactions for 25 companies.

Venture investor Ben Horowitz, of Menlo Park, Calif.-based AndreessenHorowitz, said he expects these marketplaces to founder once tech valuations retreat.

The lack of information compared with public markets can make the downside steeper, he said.

On truly public markets, "information is relatively symmetric" between buyer and seller, he said. On these markets, "the seller knows everything and the buyer knows nothing." With this clarity, Mr. Horowitz said, "we've seen case after case after case where the SharesPost price is up to 30% higher than a subsequent transaction."

SecondMarket Chief Executive Barry Silbert said the business would mature over time and would attract attention of companies having a hard time reaching public markets. "Every major idea seemed crazy until there was a breakthrough," Mr. Silbert said. "We're really talking about creating the next new marketplace, the next new U.S. exchange."

Mr. Silbert's view highlights the inherent contradiction in these markets. For a market to work best, investors need to be comfortable that they can trade at will.

But it will be hard to attract enough necessary buyers without the kind of detailed disclosure made in a full-strength public offering. And if that is the case, why not just go public anyway? These problems ultimately stymied previous efforts in the last Internet booms, one known as IPOnet in the mid-1990s, and the now-defunct Wit Capital of the high dot-com era.

These markets are "trying to do something at scale that is inherently private," said Robert Robbins, an attorney at Pillsbury Winthrop Shaw Pittman. "If you want to permit a large Internet-based resale market … you have to provide some basic level of information to the market."

If Grandma were around today, she would view the folly of it all and remind me that "if you can't say anything nice, don't say it all." Sorry, Grandma.

Write to Dennis K. Berman at dennis.berman@wsj.com