While yesterday brought news that Facebook is courting bankers for an upcoming IPO, CEO Mark Zuckberg has always be publicly coy about the idea of entering the public markets.
A new bill proposed by Reps. David Schweikert (R-AZ) and Jim Himes (D-CT) would amend the Securities Exchange Act of 1934, setting aside a number of limitations that push fast growing tech companies to IPO.
A draft of the bill obtained by Dan Primack at Fortune highlights three key areas. Changing the so-called 500 shareholder rule to accommodate 1,000 stake holders. This is the threshold at which the company would have to go public, or at the very least, begin to reveal financial details.
Doubling the number of shareholders pales in comparison to the following changes, however, because it still sets a numerical limit. The proposed bill would also exempt employees and accredited investors from that shareholder count.
In today’s tech world, that would mean a company like Facebook could continue to raise money on the secondary markets, where only accredited investors are allowed. While normal mom-and-pop stock pickers would be shut out, private capital from wealthier individuals could continue to fuel a start-up’s growth for years without the company revealing significant financial details about its performance.
The leading lights of the New York tech scene are divided on this issue. “The best companies will most likely eventually go public and deal with the issues that being a public company presents, but the value creation that occurs pre-IPO has been and will likely to continue to be very significant,” Fred Wilson wrote on his blog, A VC. “And it would be a fantastic outcome if the SEC decides to allow the general public to be a more active participant in the value creation that happens while companies are still privately held.”
Others in the New York venture community see the focus on private markets as misplaced. “I think the SEC and White House should be focused on helping small companies to go public,” Greycroft’s Alan Patricof told Betabeat by phone. “That would have a greater benefit for entrepreneurs and our economy than expanding the scope of these private markets.”
As I wrote back in April when word first emerged that the SEC was mulling changes to the 500 shareholder rule:
According to the WSJ, the average number of IPOs each year has plummeted, from 503 during the 1990s to 130 during the aughts. At the same the transactions in private shares has jumped from $2.4 billion in 2009 to $4.6 billion last year. But has the general public really missed out on an enormous opportunity, as Wilson suggests? Certainly LPs in the nation’s top venture funds may have seen great returns, and USV has some big winners in its portfolio of private companies. But as an industry, venture returns over the last decade have been flat to negative.
If the SEC’s response to the boom in private markets is to broaden access to them, both by increasing the pool of possible stake holders and relaxing the ban on soliciting buyers, then it needs to put in place new rules as well. That would help to ensure that platforms like SecondMarket and Sharepost become a productive new paradigm for funding young companies, not an artifact of the cyclical boom and bust in tech, with a new class of smaller investors left holding the bag.