Investing in private startups is a hot trend. But, sorry, you’re not invited.

August 14, 2014, 11:36 AM UTC
contract armin harris
Kyle Bean for Fortune

Reports of the demise of SecondMarket have been greatly exaggerated.

The company carved out a niche by facilitating trades of private-company stock, particularly pre-IPO shares of LinkedIn (LNKD) and Facebook (FB). But once those companies went public, trading volume in the so-called secondary market stalled, and publications including the New York Times predicted that the sun was setting on SecondMarket and other secondary exchanges like SharesPost. Bloomberg reported in January that both exchanges had “wound down” operations.

But that “couldn’t be further from the truth,” SecondMarket founder and chairman Barry Silbert told Fortune recently.

Indeed, secondary trading volume—both at SecondMarket and more broadly—recently surpassed its pre-Facebook IPO heyday. According to data provided exclusively to Fortune, SecondMarket has already facilitated more than $900 million in secondary stock sales in the first half of 2014 alone—nearly quadruple the $250 million it did all of last year. Overall, secondary transactions will total $17.7 billion this year, estimates private equity research firm NYPPEX. That’s nearly 30 times the secondary volume a decade ago, and almost double the 2011 peak volume before Facebook went public. “Many people thought it would disappear after Facebook, and it didn’t,” says Andy Boyd, head of global equity capital markets for Fidelity, who also oversees the firm’s private investments.

Silbert says he wouldn’t be surprised if turnover among its private stocks was similar to turnover in some publicly-traded stocks. (For more about the booming private stock market and investing in startups, see my story in the Sept. 1 issue of Fortune, “Should you buy stock in private companies?”)

Fueling the increase in secondary trading is the Jumpstart Our Business Startups (JOBS) Act of 2012, which raised the number of shareholders a private company could have from 500 to 2000. (Facebook is believed to have gone public when it did because it was about to cross the 500-shareholder threshold.) The JOBS Act was also designed to expand investors’ ability to buy private company stock—thereby helping startups raise money—though the private market is currently still limited to accredited investors who meet certain SEC standards of wealth. But at the same time, companies also cracked down on secondary trading in their shares by asserting their right to veto trades in their contracts with equity-holding employees and early shareholders.

So today’s secondary market, and SecondMarket itself, are not what they used to be: While the old model allowed shareholders to auction their stakes to any willing buyer, sometimes independent of the company’s approval, SecondMarket today only works with the private companies themselves to host official secondary transactions where the companies set the price of their own shares and choose the buyers.

Not only does this limit startup employees’ ability to cash in their private shares, it also shuts out retail investors. “It’s a big change from the market in the early days, where if you had money, and someone had shares to sell, you might be able to get some Facebook stock,” Silbert says. “Not only do buyers have to be accredited, but they basically have to be an institution.”

Unlike venture fundraising rounds, secondary transactions don’t even raise capital for startups; they’re more similar to public-market transactions where shareholders trade amongst each other. So companies can afford to be extremely picky about the buyers in their secondary transactions, and are more likely to choose a respectable institution whose name will act as a stamp of approval on the startup, or who will contribute valuable advice.

Kevin Landis, founder and chief investment officer of Firsthand Capital Management which oversees $400 million, has been investing in Silicon Valley tech companies since the 1990s dot-com boom, but says Twitter (TWTR) rejected him the first two times he tried to buy its stock on the secondary market. “Just because you like a company doesn’t mean they want to dance with you,” Landis says.

The hottest tech companies—the ones retail investors most want to invest in—are also the hardest for individuals to access, in secondary transactions as well as in direct primary funding rounds. “These companies have investors tracking them down and pounding their door down,” says Bill Siegel, who recently took over Silbert’s place as SecondMarket CEO. “It’s the bad companies that struggle to raise money.”

Indeed, there are plenty of companies that will gladly take retail investors’ checks—and may not even ask whether they are accredited or not. But those companies are more likely to be young and desperate for money, signaling risk. And they’re also less likely to negotiate with individuals, so the deal terms—even if investors are savvy enough to know what protections to ask for—may be less favorable, perhaps not even granting the investor the right to regular financial disclosures, says Georgetown University law professor Don Langevoort, who specializes in securities regulation.

“What is sold is not Facebook, but it’s a company you’ve never heard of,” says Langevoort, who uses the word “wager” instead of “investment” for those kinds of deals, and compares it to buying a lottery ticket. “If I were an investment adviser I would tell all of my well-off clients, just don’t even listen to those pitches.”

Interestingly, SecondMarket itself says it doesn’t think private-company shares are appropriate for any individual investor—and says it will never get into the trendy equity crowdfunding business, even though forthcoming JOBS Act rules (long awaited, and expected as soon as later this summer) would allow even the average person to invest in startups. After all, SecondMarket has several hundred shareholders of its own (between the company itself and funds it runs), many of whom are angel investors, and yet fields anxious calls regularly.

“It doesn’t take long for an individual investor to start asking questions about when they can get out,” Siegel says. “Imagine that if you were to put these investments in the hands of people who are just used to holding stocks and cash? I don’t see how that could ever be tolerable. I see a real recipe for a lot of disappointment; it’s a recipe for trouble, quite frankly.”

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