500 Shareholder Limit to Increase? US Govt Considering Big Changes to Rules Governing Private Stock - Mashable - 8 Apr 2011

Thanks to Facebook, the U.S. government is reportedly close to
changing long-standing rules governing private company stock. It’s a
move that could fundamentally change the startup, venture capital and
IPO worlds.

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The Security and Exchange Commission recently issued a
letter to Representative Darrell Issa (R-CA), outlining potential
changes its heavily considering to how the law treats shares of private
companies. “The staff is taking a fresh look at our rules to develop
ideas for the Commission about ways to reduce the regulatory burdens on
small business capital formation,” SEC Chairmain Mary Schapiro wrote to
Issa, according to The Wall Street Journal.

The
biggest change proposed in the letter is raising the limit on the
number of shareholders a private company can have without being forced
to disclose their financial information to the public. Currently that
number is set at 499 by the 1934 Securities Exchange Act. It’s a number that Facebook is trying to avoid surpassing
so that it doesn’t have to open its books, and it’s also the number
that drove Google’s decision to go public in 2004. According to
Schapiro, the SEC can increase the limit without Congress’s approval.

By
changing this number, startups and fast-growing companies will have
more time before they have to disclose sensitive financial information
to the public. It could have a dramatic impact on the IPO market by
giving companies incentives to delay filing for IPO. In addition, the
SEC is considering relaxing the ban on general solicitation, which would
make it easier for private companies to publicize private share
offerings.

The SEC is also investigating the use of “special purpose vehicles,” a tool  more...