How Facebook could stay private after all

By Felix Salmon
June 14, 2011
Dan Primack has some huge news today: new legislation being put forward is likely to radically change the calculus which currently forces companies to go public after they have more than 500 shareholders.

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Dan Primack has some huge news today: new legislation being put forward is likely to radically change the calculus which currently forces companies to go public after they have more than 500 shareholders. If the bill being proposed by David Schweikert and Jim Himes becomes law, most VC-backed companies would never run into a shareholder limit: not only would the number be raised from 500 to 1,000, but employees and venture capitalists and other accredited investors wouldn’t count towards that total.

Schweikert tells Primack that the bill could get enacted by year-end, and that it’s likely to “move substantially on its own” rather than being subject to horse-trading. Certainly it doesn’t seem to be particularly right-wing or left-wing, and Schweikert says he’s got support even from the exchanges. There’s no natural constituency to oppose the bill, or lobby against it, which certainly helps its chances.

The bill would certainly be very popular in Silicon Valley, which is an important source of campaign donations in a presidential election year. And conceptually it makes sense. There’s no reason to force companies to go public just because of anachronistic rules, not when going public is such a drastic and irreversible move.

On the other hand, I do worry that if this bill goes through, the number of companies going public will fall even more, and the investing public will have access to even less of the investable universe than it does at present. Is it a good idea that only VCs and plutocrats have access to asset classes like fast-growing VC-backed companies? Probably not. But I’m also not sure that’s in and of itself reason to oppose this bill. The key constituency here is the SEC: if they’re OK with this, it’ll go through. And maybe Facebook won’t go public after all.


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Transparency. Or a lack thereof.

Posted by GRRR | Report as abusive

My gut feeling is that it smacks of the defenses for the shadow banking sector and the boom in asset-backed securities. We assumed that banks and sophisticated investors would not need the traditional transparency in their transactions. However, it turned out that short-term incentives misaligned the interests of market actors and created a bubble in structured assets.

On the other hand, the issue with the structured assets was not their losses. They created a banking crisis because they were hard/impossible to value and there were a lot of them bank balance sheets.

As long as these risky shares with lower disclosure, like Facebook, do not find their way onto bank balance sheets, then it should be fine.

Posted by mwwaters | Report as abusive

Gosh, won’t it be great when investors don’t have to worry about poring over firms’ audited and attested-as-accurate financial statements! Shoeshine boys and barbers will have to claim a net worth of > $1MM but will be able to pass on their insights inexpensively and efficiently.

Posted by WaltFrench | Report as abusive

On the other other hand, being a public company isn’t necessarily all that great either–they tend to be managed in a very short-sighted way, to maximize the next quarter’s share price. And let’s face it–most investors are plutocrats already, or institutional investors. Individual “retail” investors don’t make the market. A well-managed private company is better off not subjecting itself to the whims and pressures of Wall Street vultures.

Posted by Moopheus | Report as abusive