SEC Wrestling With Private Trading Rules

U.S. securities regulators are conducting a broad review of share issuance rules for private companies, including the 500-shareholder threshold meant to mark the transition to public ownership.

The Securities and Exchange Commission review could make it easier for private companies to raise capital while delaying an initial public offering and the accompanying increase in financial disclosures.

"We are approaching it with an open mind," SEC Chairman Mary Schapiro said of the policy review on Friday to a group of business journalists. "I really can't predict what, if any, change will come out of that."

The issue has jumped into the spotlight recently as Wall Street banks and electronic markets offer investors a chance to buy and actively trade stakes in hot Internet companies such as Facebook and Twitter before they go public.

An April 6 letter from the SEC to House Oversight Chairman Darrell Issa sets out the issues involved in the review but is careful not to come to any conclusions.

The use of special purpose vehicles, or SPVs, that aggregate investors and help avoid the 500 threshold, is among the issues being examined, as is the increasingly active trading of private shares on electronic platforms.

SEC rules on what constitutes a "general solicitation" for investors, banned for private placements, is also under scrutiny.

Goldman Sachs had planned to offer both U.S. and foreign investors a chance to own shares in Facebook through an SPV. Later in January it opted to limit the offering to foreign investors, citing "intense media coverage" of the deal.

The effects of any SEC rule changes could be mixed. Raising the 500 investor threshold, for example, could be offset by tighter rules on SPVs.

The rules also affect public companies that seek to "go dark" by returning to private ownership status.

"Many of the rules we have in place governing the offering process are decades old," Schapiro said on Friday. "It makes sense for us ... to take a look at whether our rules have kept pace with changing market dynamics."

Schapiro's letter to Issa showed an SEC wrestling with the needs of private companies to raise capital against the investing public's right to get the information they need to make informed decisions.

"I think all Mary Schapiro is really saying is that she wants a more realistic counting system that is less susceptible to manipulation," said J. Robert Brown, a professor at the University of Denver Sturm College of Law.