The SEC is alleging that some of the funds and trading firms set up to cater to this hunger for pre-IPO shares of companies like Groupon (GRPN), LinkedIn (LNKD), Zynga (ZNGA) and, above all Facebook, have been playing a bit fast and loose.

After a year-long investigation into the twilight market where these shares (often previously owned by employees or other insiders who need liquidity) change hands, the SEC charged SharesPost with acting as a broker-dealer and failing to register as one. They claim that Frank Mazzola of Felix Investments committed civil securities fraud by telling his investors that his funds owned Facebook shares when they did not, and misled investors about his relationship with senior Twitter execs.

As more of the hottest social networking stocks have gone public, and as Facebook marches inexorably toward its own public-market debut, the interest of general investors in grabbing a piece of the action has only grown. Many firms have sprung up to cater to this interest, such as SecondMarket, where investors can buy or sell not only shares in still-private companies but even bankruptcy claims, quirky structured products and now stock in community banks.

SecondMarket gives the company -- for example, Facebook -- the power to veto a transaction if it doesn't want that individual owning shares. An ordinary individual investor isn't likely to be deemed an "accredited investor," say people familiar with the process, or be approved to buy shares of the hottest startups. But the hope of somehow getting hold of a stray Facebook share or two drives people to the less-regulated and less-transparent part of this nascent business.

Regulators were inevitably curious about how this market was developing and regulating itself, particularly those with a mandate that extends to investor protection. After all, most pre-IPO companies don't file financial statements with the SEC, making it hard to do due diligence, especially for outsiders.

To some within the business, the fact that the SEC crackdown hit smaller players -- and that many of the individuals and firms charged settled the allegations against them by paying fines but neither admitting nor denying the claims -- is reassuring. Had regulators found something amiss with a firm like SecondMarket, it may well have put an abrupt end to the ongoing efforts to build a new and innovative trading business.

The news made a bit of a splash because it involved Facebook and Twitter. But what is more significant is the timing: The SEC announced the charges only days after the House of Representatives passed the JOBS act, discussed in a previous column. As noted, while the bill --aims to make it easier for startup companies to raise capital by lifting some regulatory constraints on them, such as a 1982 rule that they can’t advertise for investors -- there are some potential unintended consequences.

CFA Institute, an association of investment professionals, described the bill as possibly the "worst public policy move in terms of investor protections" since the Gramm-Leach-Bliley Act of 1999 struck down most of the post-Depression barriers blocking banks from getting involved in the securities business, notably key provisions of Glass-Steagall.

Just in case that wasn't damning enough, the organization went on to argue that "exempting IPO companies from basic internal controls, allowing them to withhold executive compensation data, and permitting them to selectively release material non-public information . . . is blatantly unethical and could increase incidents of fraud."

Fighting words, sure, but then the CFA Institute, like the SEC, has seen plenty of casualties when greed triumphs over good judgment, even when it doesn't cause a systemic shock to the global financial system. As interest grows in trading shares of companies that haven't yet gone public, the need for vigilance on the part of regulators will only grow along with it.

Related Links:
Goldman and Facebook: Insiders Trade, Others Keep Out
Facebook’s IPO: 10 People Who Will Strike It Rich
The 14 Biggest IPOs in History