The same day Facebook was scheduled to make its first filing with the Securities and Exchange Commission, an advisory group recommended that the SEC dial back a rule that partly forced the social-media site into near-public-company status.
The SEC requires privately held companies with 500 or more shareholders and more than $10 million in total assets to file financial reports with the regulator. Just over a year ago, Facebook triggered this requirement after a $1.5 billion Goldman Sachs–led private placement.
On Wednesday the SEC’s Advisory Committee on Small and Emerging Companies voted to recommend the commission raise the 500-shareholder threshold to prevent private companies that are not yet ready for prime time from being among the businesses that make public offerings. The committee members are also suggesting that employees not be included in the tally as long as they are not actively trading their shares.
The SEC rule on this issue has been in place for more than 45 years and needs to be updated, according to the committee members. “A number determined in 1964 has little relevance to today’s markets,” says co-chair Stephen Graham, a partner in the corporate group of law firm Fenwick & West.
Graham’s group is recommending that instead of the 500-shareholder threshold, the SEC raise the number to 1,000 and exclude employees from the tally. Exempted employees would be those who cannot transfer their shares of the company when they exercise their options. Companies that don’t trigger the 1,000-shareholder limit may be expected to share financial data with those employees who hold stock, but that information would not have to be publicly disseminated. Companies would determine their number of shareholders on an annual basis. Community banks would have a higher threshold of 2,000 shareholders.
Tandy Leather Co.’s Shannon Greene, one of two CFOs on the committee, voted against the recommendations. She said she was uncomfortable raising the threshold under the idea that the additional shareholders would suddenly not be protected by having access to financial regulatory data. Leroy Dennis, another committee member and longtime public accountant, also voiced opposition since he worried about the concept of saying employees are not stockholders under the proposed change.
The suggestions come amid Obama Administration and congressional proposals to make small businesses’ access to capital easier. On Tuesday, for example, the President announced what he is calling a Startup America Legislative Agenda, which includes several steps to ease financing for growth companies. These concepts have been in the works at the SEC for a while and are mirrored in several bills in Congress.
Graham says the committee wants to keep its recommendations fairly simple and to offer some relief to smaller companies from compliance burdens as soon as possible. These recommendations will need final approval from the SEC, which will be seeking feedback from the public and studying the details of how changing these factors could affect companies. The commission will look over past initial public offerings to try to determine whether any companies were compelled to go public because of the rule.
Also on Wednesday, the advisory committee recommended that the SEC change its little-used Regulation A, which allows nonreporting companies to make public offerings of up to $5 million in a 12-month period. The committee recommended raising the limit of these offerings to $50 million and see if interest rises. A company has to register this offering with state securities regulators and the SEC. Only three Regulation A offerings were approved by the SEC between 2009 and 2010. “It couldn’t be less popular than it is today because no one knows what it is,” says Meredith Cross, director of the SEC’s corporation finance division.
The committee members decided not to make a recommendation on regulating crowd-funding, an increasingly popular tool entrepreneurs use to raise capital that the President wants Congress to address.