SEC may ease private stock rules

By Julianne Pepitone, staff reporter

NEW YORK (CNNMoney) -- The Securities and Exchange Commission may relax its rules to make it easier for companies to issue shares without making their financial details public.

That could affect tech companies including Facebook, Twitter, Zynga and Groupon, which have attracted heavy interest from investors in private stock-sale deals.

But when the number of shareholders grows too large, the government gets involved. As the rules stand now, the SEC generally requires companies with more than 499 shareholders to disclose financial details that many companies would rather keep secret until they go public.

However, a letter from SEC chairman Mary Schapiro sent earlier this week indicated that the commission is considering raising that 499-shareholder limit and easing some other private-stock rules.

"I recently instructed the staff to review the impact of our regulations on capital formation," Schapiro's letter said.

Schapiro was responding to a March 22 letter from Rep. Darrell Issa, a Republican from Calif. In his letter, Issa asked 32 pointed questions about how the SEC was planning to address the "lag" in the U.S. IPO market.

Issa also referenced Facebook's decision in January not to offer U.S. investors an option to buy its shares through Goldman Sachs, because SEC regulations became too worrisome.

"That decision reflects poorly on our capital markets," Issa wrote.

Still reeling from the dot-com implosion, few tech companies have gone public in recent years. Private markets like SecondMarket and SharesPost, which entered the scene in 2009, have become popular as a result of the IPO dearth.

The private exchanges are more lightly regulated than public exchanges like Nasdaq and the New York Stock Exchange. That's because "retail" investors -- your average stock buyers -- can't shop on them. Only accredited investors, like investment funds and individuals with a net worth of at least $1 million, can participate.

The SEC assumes those wealthy buyers can take care of themselves, so it doesn't require the kind of financial disclosures public companies have to make. That's why Facebook has been able to keep its revenue numbers secret -- even from the investors who are sinking significant cash into shares of its stock.

That rule prodded Google (GOOG, Fortune 500), which gave stock options to many employees, into filing for its IPO in 2004.

Schapiro said she had instructed her staff to focus on a few other issues in addition to the shareholder limit. The SEC is considering easing its ban on "general solicitation," a move that would make it simpler for companies to publicize offerings of private shares.

The SEC is also looking into "special purpose vehicles," tools that banks use to help high net worth investors acquire private company shares. Generally through an SPV, the bank would count as just one shareholder toward the 499 limit -- even if multiple individuals purchased shares via the SPV.

A SecondMarket spokeswoman said the company was "encouraged" by the SEC's reevaluation.

"Updating and clarifying the rules will improve the capital formation process for small, high-growth companies," she said via e-mail.

SharesPost CEO Dave Weir said his company is an "active proponent" of changing the existing regulations, which "are constraining private companies' ability to efficiently raise attractively priced growth capital."

Lawrence Lenihan, the CEO of FirstMark Capital and a board member at SecondMarket, pointed out that many of the SEC's rules governing securities were developed in the '30s and '40s.

"It was smart at the time, decades ago, to draw this 500-person line in the sand," Lenihan said. "But now a lot of these companies have a lot of employees with equity. This realm still needs to be regulated, to be sure, but it needs to evolve with the times."

And the companies that need it most aren't the Facebooks and the Groupons of the world, Lenihan said.

"It's about the hundreds of smaller companies that are succeeding and need a fair shot," Lenihan said. "It's about giving these companies a chance to continue to grow." To top of page

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