SEC Probes Trading in Private Companies Including Facebook and Twitter

1 is just a particular variety of 2.

(By the way, you've just restated the efficient markets hypothesis.)

before the SEC changed its disclosure rules, firms could release earnings to a select group of investors before it released them to the open market. if you were in this select group, you were basically guaranteed trading profits.

theoretically, facebook or twitter could do the same.

This isn't anything new caused by SecondMarket and Facebook wouldn't be the only company that isn't traded on a major public exchange that has to publish information, example SunGard: http://www.sungard.com/aboutsungard/financialinformation.asp...

Having to file with the SEC doesn't force Facebook to go the route of a traditional IPO, they can continue to sell shares on limited access marketplaces such as SecondMarket -- they will just need to start publishing audited financials.

There is a strong possibility the firms themselves have complained about the secondary markets and the private stock funds. If they became big enough, employees could potentially undercut their employer on future funding rounds. There is also the widely held belief that employees will work harder and be less likely to quit if they can't benefit from the appreciation of their shares until a liquidity event. Also, pricing in the secondary market by insiders could signal if a company is having troubles, something that they might otherwise be able to prevent from leaking out.

You can see the results of these worries in facebook contracts that prevent current employees from selling their vested shares and the deal they struck in 2008 that allowed employees to sell only a 20% share of their vested options. If they were able to prevent ex-employees from selling their shares on the secondary markets they obviously would. So it would make some sense if the companies themselves are complaining about the practice to the SEC.

They have jurisdiction over trading of securities, which shares of private companies are... The Securities Exchange Act regulates the general-public trade in securities and amendments have extended the SECs mandate to include OTC trades as well as regulate companies that aren't listed on exchanges.

Private companies are actors in interstate commerce, so there is a classic constitutional basis for federal regulation of what they do.

http://topics.law.cornell.edu/wex/Commerce_Clause

Article 1, Section 8, Clause 3 of the United States Constitution enumerates the power of Congress "to regulate commerce with foreign nations, and among the several states, and with the Indian tribes." The Commerce Clause, by extensions throughout more than a century of Supreme Court cases, is actually the basis for perhaps as much as 90 percent of all federal legislation on all subjects, including subjects not as noticeably related to interstate commerce as security trading. The SEC gained many of its current powers in the aftermath of the Great Depression, which has been taken as a negative example of what happens when there is too little government regulation of financial markets.

They have jurisdiction over companies with more than 500 shareholders, whether or not they are traded on any exchanges. This is to prevent abuses where companies effectively go public by selling stock widely but fail to register to avoid the public disclosure requirements. What the SEC is looking into is the current trend of forming an LLC to buy private shares on a secondary exchange and then selling ownership in the LLC. This allows the owners of the LLC to invest indirectly in the private company effectively increasing the number of shareholders over 500 but not currently triggering the public disclosure requirements. The SEC may move to count these LLC owners as shareholders of the target company.