Internet entrepreneur Art Norins was sick of the nonstop phone calls and e-mails from people seeking to buy shares of his company.
After 12 months of hassling, the last straw came when an Indian call-center worker claiming to represent funds seeking investments in tech startups rang him.
"'Hi, this is XYZ Capital, would you be interested in selling your shares?"' Norins recalled of those types of calls. "It's becoming a free-for-all."
The buying frenzy over hot Web companies from Facebook, Zynga and Twitter to smaller shops such as Norins' Nor1 have pushed companies to take action.
Since Facebook began tightening guidelines on the trading of its shares on secondary markets about a year ago, the top privately held Web companies have followed as the race to snap up pieces of pre-IPO companies has attracted the scrutiny of U.S. regulators.
Twitter, one investor told Reuters, has made it nearly impossible to buy shares if you do not already own any.
The top 20 private Internet companies that trade on these exchanges "are all taking steps to control the process," the Twitter investor added.
A lawsuit filed by a would-be shareholder of Zynga last week highlighted the extent to which some companies have sought to clamp down on the explosion of activity.
"I brokered sales in the past in that company (Zynga) and it was fairly easy. They were friendly," said Larry Albukerk, a managing partner at EB Financial Group, which acts as a broker for secondary market transactions.
More recently, the deals have been difficult.
"The deal didn't get done because the company basically didn't want it to happen," Albukerk said, adding that he respected the rights of these companies to limit trading in their shares.
LinkedIn, the professional social networking service, which in late January filed to float shares to the public, blocked new investors from buying them ahead of the filing, he said.
The tightening of guidelines imposed by some companies comes as the U.S. Securities and Exchange Commission considers revising rules for the trading of stock in privately held companies, SEC Chairman Mary Schapiro told Reuters last week.
"The issue is whether investors have access to financial information ... to make reasonable and rationale decisions about investing," Schapiro said.
For companies, widespread trading of their shares also runs the risk of boosting the number of shareholders past 499, after which the companies are required to disclose financial results.
The latest actions follow several high-profile investments from Goldman Sachs and JP Morgan Chase in recent weeks to invest in well-funded Web companies that have delayed IPOs.
According to the complaint in the lawsuit filed against Zynga by an Abu Dhabi-based investment firm, Zynga unlawfully interfered with the firm's attempt to buy $12.87 million in shares owned by Andrew Trader, a co-founder of Zynga, who no longer works at the company. Zynga slapped restrictions on the trade, such as requiring that the firm buying the shares be forbidden from selling them until 180 days after the company goes public.
A Zynga spokesman said in an email the company is committed to full compliance with securities laws and that secondary markets have made legal compliance more complicated.
Ted Hollifield, an attorney at Dorsey & Whitney, said the blanket lock-up appeared to be unusual for a company whose shares were still private, but he was not surprised.
Most companies, such as Facebook and Twitter, have a so-called right of first refusal, giving the company the right to step into any transaction between a shareholder and buyer, and repurchase the shares itself.
Twitter, which last week told Reuters it had no plans to go public, asserted its control over how its shares are traded more than nine months ago, one Twitter investor said. Now, only current shareholders or other approved parties can buy shares.
"If I were a Twitter shareholder and I wanted to sell rights to you, you would have virtually no chance of owning those shares," the Twitter investor said.
Twitter and LinkedIn both declined to comment.
Other tools to block a sale of their shares include consent rights, which allows a company to approve or deny a deal based on the buyer, said Hans Swildens, the founder of Industry Ventures, a venture capital firm that does secondary direct investments.
Consent rights have been used in the past to prevent rivals from buying shares of a company to gain access to financial information and special privileges such as the right to approve mergers and other transactions, he said.
Expect such restrictions to be commonplace as more investor pour into the market.
"We will see more of this happening because both venture investors and private companies as well as regulators have concerns about the degree of trading that is taking place in private companies," Dorsey & Whitney's Hollifield said.
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