Facebook has a message for its employees selling stock: Don't.
The company instituted a new insider trading policy Friday morning that prohibits employees from selling their Facebook shares unless a trading window is opened, people working on the project said. It also warns employees not to tip outsiders who might buy or sell based on the inside information.
The policy, announced internally, comes in response to the rise of online trading sites, such as Sharespost.com, that allow anyone to buy or sell shares of companies like Facebook, Yelp, Twitter and others that have yet to go public.
The motivation for the new policy, according a person who worked on it, is to prevent legal messes that could arise from these exchanges, like lawsuits from unhappy buyers -- as a private company, Facebook doesn't release financial results -- and insider trading claims. Facebook wants to avoid "the risk that gets introduced on the legal side when it comes to the distribution of confidential information," this person said, speaking on the condition of anonymity.
Securities lawyers said those are legitimate legal concerns, but added that there are other serious implications if Facebook stock is sold willy-nilly. One is the 500-shareholder rule, which holds that any company with more than 500 shareholders must bare its soul to the world like any other public company.
"I'd worry less about the individuals' insider trading liability and more about losing control of my shareholder base and having to file to become a public company," said Robert Day, a corporate and securities lawyer at Wilson Sonsini Goodrich & Rosati.
That's what happened to Google, which was forced to go public in 2003 because it had more than 500 shareholders. The shareholder rule doesn't cover option grants. A person familiar with Facebook said that the company has not crossed the 500-shareholder threshold.
These online exchanges also set a market price that the companies might find unrealistically low or high, said Brian Erb, a Ropes & Gray partner in San Francisco who has studied the issue. For instance, Facebook is valued at approximately $12 billion on Sharespost.com's index.
"I can imagine a company would be unhappy to have a bunch of trades occurring at 50 cents when they think they're worth more," said Erb.
Companies such as Sharespost.com and Secondmarket.com have sprouted up in the past two years, following an SEC rule change that relaxed restrictions on selling shares of private companies. Sellers can post shares for sale and buyers can make offers. For instance, someone is offering 8,000 shares of electric luxury car startup Tesla Motors for $9 a pop right now.
This murky secondary market has prompted Silicon Valley lawyers to ponder the implications for their clients. Most companies do have a mechanism to keep their shares from being scattered too widely: the first right of refusal. It gives companies the first crack at buying stock from employees who want to sell. The downside is that a startup probably doesn't want to spend all of its cash buying its own stock.
Facebook's policy appears to be the first formal response to the online markets. However, securities lawyers do not expect it to become a trend because relatively few startups have generated a secondary market for stock the way Facebook has.
Facebook in-house lawyers and its outside counsel at Fenwick & West worked to come up with the new policy, which Facebook spokesman Larry Yu said was intended to better comply with insider trading laws and to protect the interests of the company and its employees and shareholders.
It's not the first time that Facebook lawyers have had to make special adjustments with the company's stock. In 2008, Fenwick got the SEC's OK on a plan to issue unregistered restricted stock grants to employees, directors and consultants, with those grants not counting toward the 500-shareholder threshold.
And last year, the company arranged for Russian investors at Digital Sky Technologies to buy $100 million of stock from employees and former and employees.