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There’s been a lot of buzz this week about a potential IPO by Facebook, which CNBC says could hit the street in early 2012 and give the company a market value as high as $100 billion. But if a bill being proposed by a group of senators makes it through Congress, Facebook and many other high-profile technology stocks may never have to go public at all. That might make Mark Zuckerberg and some other CEOs happy, since it would save them from having to deal with shareholders and disclosure laws, but it could deprive the public markets of some significant momentum.
As described by Dan Primack at Fortune magazine, the draft bill proposed by a group including Reps. David Schweikert (R-AZ) and Jim Himes (D-CT) would significantly water down the current “500 investor” rule, an SEC regulation that currently requires companies that have more than 500 shareholders to file public documents (Primack has some more details about the bill and a Q&A with Schweikert here).
Although this rule doesn’t actually force a private company to do an IPO or issue public shares (as some people mistakenly assume) many companies — including Google — have issued public share as a result of the rule. The thinking seems to be that if you have to disclose your finances in public filings with the securities regulator anyway, then you might as well just throw in the towel and go public.
As Primack describes it, the bill would effectively blunt the force of the 500-investor rule in several ways, including:
- It would double the threshold for the rule to 1,000 shareholders.
- Employees who own shares would not be counted for the purposes of the rule.
- “Accredited investors,” such as pension funds and those with a net worth of more than $1 million, would not be counted as part of the 1,000 number.
Facebook already got approval some time ago from the SEC to exempt its employees from the 500-investor rule, but it has bumped up against the requirement in other ways — in particular, by cutting a deal with Goldman Sachs that saw $1.5 billion in financing injected into the company by a private investment vehicle the brokerage firm set up for that purpose. Some critics complained that the vehicle was an obvious ruse to get around the 500-investor rule, as is the trading of shares on secondary markets, and the SEC has sent out information letters to some companies about their private share trading.
At the same time, however, the regulator has been under pressure for some time to either remove or blunt the force of the 500-investor rule, which critics — including venture capitalists such as Twitter financier Fred Wilson of Union Square Ventures — say is unnecessarily restrictive when it comes to the financing options available to companies. And there have been some signs that the SEC is open to doing this, including comments from the agency’s chairman last month that suggested it is considering loosening the restrictions on when companies are required to file public documents.
It’s important to note that there are plenty of other reasons why companies go public other than the 500-investor rule. In many cases, the venture capitalists and other private investors who have financed a company through its early days of growth are looking for a return on their investment — and only a splashy public offering can produce the kind of multiple on those investments that make it worthwhile for funds to do so. So even if the rule is changed or removed, Facebook may still go public.
However, with the kind of capital resources that it and other companies (like Twitter) can access through private deals similar to the one Goldman Sachs put together — as well as private investments from entities such as Digital Sky Technologies, and secondary share-trading services like SecondMarket — there is no longer as much pressure for even hot tech players to go public just to raise money or provide liquidity for investors. And that could blunt the force of any IPO land grab that Facebook was expected to lead.