Groupon Inc's IPO may be the biggest test yet for the nascent private stock exchanges that allow investors to trade the shares of hot start-ups like Facebook Inc before they go public.

The daily deals website is the first major company set to price its initial public offering at a valuation far below what it fetched in private exchanges, raising the question of whether Groupon could take the wind out of private markets like SecondMarket and SharesPost.

Venture capitalists say some participants of the so-called secondary market could pull back if they suffer huge losses in Groupon. Others argue that such losses are a sign of the market maturing and sophisticated investors should know prices do not always rise.

They're certainly going to be a lot more cautious, said Vladimir Belinsky, president of Hermitage Advisors, which invests in hedge funds and venture capital for wealthy people.

He said he would advise his clients to be careful investing in the secondary market. This is a good thing for the employees -- they get liquidity and have been able to sell into a frenzied market and get more money, Belinsky said. But I don't think it's so good for investors.

Books are expected to close on Thursday for Groupon's IPO, which has an indicative price range that values the company at $10.1 billion to $11.3 billion.

There is talk that Groupon may nudge the IPO price higher, but it is unlikely to go anywhere near the value of close to $20 billion that the company fetched in the secondary market this summer.

That's bad news for investors such as GSV Capital Corp, an investment fund run by Michael Moe that bought Groupon shares in the secondary market in August at an implied valuation of $16 billion.

If Groupon shares do not rise to near that figure after they start trading on Nasdaq, GSV will have to eventually write down the investment to reflect the decline in value, Moe said.

It does speak to the pluses and minuses of participating in private shares, Moe told Reuters. Our calculations haven't changed, but market sentiment changed in August and September and there were some specific problems with Groupon.

MORE ART THAN SCIENCE

Moe, former head of technology investment bank ThinkEquity Partners, shepherded GSV through its own IPO this spring, raising about $50 million. The company completed a follow-on offering on Oct 3 to raise more than $29 million.

GSV is using the money to invest in private technology companies, often through secondary market transactions.

These private exchanges grew up in the wake of the dot-com bust in 2000, set up to match the financing needs of start-ups when IPOs got tough. Their growth has been fueled by keen investor appetite for social networking companies like Facebook and LinkedIn Corp.

SharesPost, run by former J.P. Morgan tech banker Dave Weir, and SecondMarket, started by Barry Silbert, are two of the largest such exchanges. Liquidnet launched in October.

On SecondMarket, the most followed companies at the end of September were Facebook, Twitter, Groupon, Zynga and Foursquare. It completed a record $167 million worth of private company stock transactions in the third quarter. Such trades in the first three quarters of the year were up 75 percent from the same period last year, at $435 million.

Asset managers, hedge funds and venture capital funds made up more than a third of the buyers on SecondMarket in the third quarter. Other accredited investors are wealthy individuals.

The concern is that if secondary market investors lose a lot of money in Groupon, some of them may stop buying private company stock. That would reduce liquidity and make the market less attractive to other start-ups.

GSV has also bought shares of Facebook in the secondary market. If people think there's a no-lose proposition in secondary market trading, that's wrong, Moe said. We're trying to acquire shares in the best private companies at a price we think makes sense for intermediate and long-term returns, but it's definitely an art and science.

He added, Information is less available than with public companies and there's less trading history, so you're depending on your analysis more.

Groupon traded at implied valuations of above $19 billion in June and July, according to Wedbush Securities, which makes markets in pre-IPO stock. If Groupon completes its IPO at a valuation of $11.3 billion, that would be more than 40 percent below those levels -- a sharp contrast to LinkedIn and Pandora Media, which priced at above secondary market values.

LinkedIn shares closed on Tuesday at $88.90, near double their IPO price of $45, while Pandora shares have fallen to $14.47 compared with their IPO price of $16.

SharesPost said it has not facilitated any transactions in Groupon shares. A spokeswoman for SecondMarket declined to comment.

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Groupon is being closely watched because a good debut could bode well for social games company Zynga, which plans to go public later this month, as well as for Facebook, arguably the most hotly anticipated Internet IPO since Google Inc.

Hermitage Advisors's Belinsky owns shares of Facebook, Zynga, Groupon and Twitter through investments in funds of funds, which had exposure to VC firms holding such stakes.

He said the holdings are at early venture-stage valuations, apart from Facebook, which was purchased at a $25 billion valuation.

I loved to see these valuations go sky high. But my fear is that by the time these companies go public the bloom is off the rose and valuations won't be as high, Belinsky said. We will still get a great return on our investments. But later investors may not generate such big returns.

Tom Conaghan, a partner at law firm McDermott Will & Emery, which represents secondary trading platform Gate Technologies, thinks the Groupon IPO may be a sign that the secondary market is maturing.

While early pre-IPO trades in Facebook, Zynga, Twitter and LinkedIn may have made money, ironically enough, losses by pre-IPO Groupon traders may present the true validation for the legitimacy of these secondary markets, he said.

Real investors in healthy markets know that it is not 'all up all the time,' he added. I suspect that even those who may incur losses on Groupon will not give up on secondary markets.

(Reporting by Alistair Barr, editing by Tiffany Wu, Gary Hill)