Was I the only one who was surprised that Facebook allowed their employee to trade in these shares for such a long time?  It just makes sense to me that a company in the stages of growth that Facebook is in, may want to tightly control who can become a shareholder.

Probably not so much "who" owns a small minority of stock in the company but more likely it's "how many."  You hit 500 shareholders, regardless of being private or public, and the SEC will require that you disclose financial information, which FB has been very quiet about.  They certainly don't want that information out on the street, so I am thinking that it was the later area that caused them to crack down.

Both the "who" and the "how many" are valid concerns and it's good that FB is addressing this. It's interesting to read of these secondary markets for pre-IPO shares.

@Brock: The 500 shareholder cap is a serious concern.  It was likely the driver of this new rule since you are correct in stating that Facebook would probably like to keep the world guessing about their value (I saw recent estimate of $35 BIL!).

@Tahir: I agree the "who" is a major concern for companies trying to keep things simple as a non-public company.  Having shareholder you don't know and who do not care about your company and its culture is an expected issue when you are publicly traded.  Having these people as shareholders when you are still private can be troublesome.  They may insist on coming to shareholder meetings.  They may insist on support for an investor relations department that does not yet exist.

While creating this market for private shares can help employee capitalize on their equity, it is probably not the best solution for most companies.

One can address voting control concerns through either voting trusts or the use of non-voting common shares (permissible in California only in the last few years), but there is still the right of inspection that each shareholder has under state corporate law. Obtaining a confidentiality agreement as a condition to disclosure is often not a satisfactory solution.

Is there a high-level explanation somewhere on the mechanics of creating a secondary market for private companies?  

here's a video from one of the companies talking about how they offer this capability. There are a few major players - SecondMarket, RestrictedStockPartners, XChange and others.

Assuming they grant broadly, with 1,200 employees, I'm surprised 500 of them haven't exercised options and become shareholders already.  I know the options are exempt from the 500-shareholder test but the underlying shares aren't, right?

That's right. Going back to exercise though, the Rule 144 holding periods apply pre-IPO notwithstanding Rule 701, so that can discourage. Tax recognition on exercise may discourage. Vested share repurchase options can be included now to come into play on termination of service so that can hold down the number of shareholders if provided for in the option agreement (the effect on incentive must be weighed before doing this though).  The incentive of additional pre-IPO grants if exercise is refrained from may be an incentive. The option agreement can also include a provision barring exercise if to do so would require registration of securities. Some thoughts that come to mind.