The SEC has said it is considering raising the shareholder limit for private companies in a letter to Rep. Darrell Issa obtained by the WSJ.The SEC has a rule that says that once a private company reaches 500 individual shareholders, it has to report publicly the way a public company does, so this rule is an incentive for companies to go public: if they’re going to have the drawbacks of being public (disclosure) they might as well have the advantages (access to public markets).
The 500 shareholder rule is thought to have been a big reason why Google decided to go public in 2004 after delaying for a while. It’s thought a big reason why Facebook decided to do its last round of funding from a “special purpose vehicle” built by Goldman Sachs with money from tons of their rich private clients was to get around that SEC rule.
So if the SEC changes the rule it might be a further disincentive for tech companies to go public. Tech companies like Facebook and Zynga are deciding to stay private ever longer, getting funding and liquidity through late stage funding rounds and private markets.
On the one hand, the SEC rule was always hard to understand: why does it matter to whether a company must report publicly how many shareholders it has? On the other hand, the secondary markets are increasingly looking like a disaster in the making and plenty of investors and employees are waiting for a bunch of tech companies to finally go public to give a boost to the tech ecosystem.
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