Eight U.S. lawmakers backed a bill that would allow closely held firms including Facebook Inc. and Twitter Inc. to have as many as 1,000 shareholders before being required to file public financial statements.
The legislation, introduced today by Representative David Schweikert of Arizona, would also exclude employees and accredited investors from the rules, which currently set the ceiling at 500 investors.
“The underlying premise is that there is lots of capital sitting on the sidelines and for some reason it’s not flowing into the market,” Schweikert, a Republican on the Financial Services Committee, said in a telephone interview. “The current rules just seem to be out of date.”
The legislation is the latest attempt by lawmakers to revise the regulations that governed closely held firms since 1964. Representative Darrell Issa, a California Republican and chairman of the Oversight and Government Reform Committee, has called on Securities and Exchange Commission Chairman Mary Schapiro to loosen the rules.
Closely held companies with fewer than 500 shareholders aren’t required to disclose financial data, so investors often don’t know key figures such as revenue, profit, cash flow and debt obligations.
Schapiro, in responses to Issa in a letter and in testimony, said the SEC is in the midst of studying whether the growth of closely held companies is being hindered by limits on the numbers of shareholders they can have.
Regulators focused on markets for trading private shares after Goldman Sachs Group Inc. (GS) planned and then dropped a plan to offer as much as $1.5 billion in Facebook shares to U.S. investors.
Schweikert, whose seven co-sponsors include Representative Jim Himes, a Democrat also on the Financial Services Committee, said he would like to have a hearing on the issue this summer, with the possibility of attaching the bill to a package of measures moving through the panel.
“At worst, we telegraph to the regulators that there’s a congressional will to move in this direction,” Schweikert said.
Secondary markets have grown increasingly popular as funding sources, in part because requirements imposed by the 2002 Sarbanes-Oxley Act and last year’s Dodd-Frank Act have made accessing public markets more expensive. The trend has spawned new exchanges for unregistered shares, including New York-based SecondMarket Inc., San Bruno, California-based SharesPost Inc., San Mateo, California-based Xpert Financial Inc. and New York- based Gate Technologies LLC.
Trading on those exchanges is reserved for so-called accredited investors -- people with at least $1 million in assets or $200,000 in annual income -- and a basic premise of securities laws is that they are sophisticated enough to fend for themselves without regulators’ protection.
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