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May 10 (Bloomberg) -- The U.S. Securities and Exchange Commission is studying whether growth of closely held companies is being hindered by limits on the number of shareholders they can have, SEC Chairman Mary Schapiro told lawmakers today.

The agency’s staff is reviewing a rule that requires firms with more than 499 shareholders to disclose financial information, as well as other restrictions on how nonpublic firms can solicit investors, Schapiro said at a House Oversight and Government Reform Committee hearing on the future of capital formation. The SEC is forming a committee on small and emerging firms to contribute to the review, she said.

“Companies seeking access to capital should not be overburdened by unnecessary or superfluous regulations,” Schapiro said. “At the same time, while we have an important responsibility to facilitate growing companies’ access to America’s investment capital, we must balance that responsibility with our obligation to protect investors.”

The SEC sharpened its focus on how unlisted companies raise money after Goldman Sachs Group Inc. halted a planned offering of as much as $1.5 billion in Facebook Inc. shares to U.S. investors. Goldman Sachs said on Jan. 17 it pulled the offer because of concern that “immense media attention” could violate SEC rules limiting marketing of private securities.

Issa Statement

That decision showed that “private capital formation in the U.S. is increasingly difficult,” Representative Darrell Issa, the California Republican who leads the House panel, said in a statement yesterday. “Reversing this trend and efficiently attracting capital to the best investment opportunities in the United States is critical to a widespread economic recovery and the long-term viability of our global market position.”

The 499-owner limit, which applies to firms with more than $10 million in assets, was created to ensure that shareholders get sufficient information about their investments. While the law counts so-called owners of record toward that threshold, people who invest through a fund -- the so-called beneficial holders -- aren’t included.

Schapiro has asked staff to review both the number of shareholders that should trigger registration as well as how those holders are counted, she said in her statement.

Barry Silbert, chief executive officer of SecondMarket Inc., urged that the limit be significantly increased or eliminated altogether.


The shareholder limit “has created a disincentive for private companies to hire new employees, or acquire other businesses for stock, as these private companies are fearful of taking on too many shareholders,” Silbert said at the hearing.

Silbert, whose company bills itself as the largest secondary market for trading alternative investments, said public markets have become inhospitable to smaller firms after online brokerages cut demand for research and regulatory compliance costs increased.

Secondary markets have become more 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, San Bruno, California-based SharesPost Inc. and San Mateo, California-based Xpert Financial Inc.

Trading of shares in closely held firms has tripled since 2009 and is likely to rise 51 percent this year to almost $7 billion, according to Nyppex LLC, a New York research and advisory services firm.

Accredited Investors

The investments, which can be riskier than bets on publicly traded stocks, are reserved for so-called accredited investors - - people with at least $1 million in assets or $200,000 in annual income. A basic premise of securities law is that such investors are sophisticated enough to fend for themselves without regulators’ protection.

Silbert said the SEC should lift a restriction on general solicitations for investors. What’s most important is that shareholders meet the accredited investor criteria, he said. As part of reviewing whether to keep the ban, Schapiro said the agency will study whether it violates freedom of speech.

“I recognize that some continue to identify the general solicitation ban as a significant impediment to capital raising for small businesses,” Schapiro said. “At the same time, the general solicitation ban is supported by others on the grounds that it helps prevent securities fraud by making it more difficult for fraudsters to attract investors or unscrupulous issuers to condition the market. We need to balance these considerations as we move forward in analyzing this issue.”

To contact the reporter on this story: Joshua Gallu in Washington at

To contact the editor responsible for this story: Lawrence Roberts at

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