SEC reviewing rules on shares of private firms

Facebook CEO Mark Zuckerberg speaks during a media event at Facebok headquarters on April 7, 2011 in Palo Alto, California.

Bob Moon: Did you see that scene in "The Social Network," where they're talking about what Facebook could be worth?

"The Social Network" clip: A million dollars isn't cool -- you know what's cool? A billion dollars.

Well, Facebook's now valued as high as $75 billion, but it still hasn't gone public. As we've learned in recent months, shares of Facebook -- and other powerhouses like Twitter and Groupon -- are already being traded privately. There's currently a cap of 499 shareholders before a company has to open its financial books to the public.

But the Securities and Exchange Commission confirmed today it's considering relaxing that rule. As Marketplace's Stacey Vanek Smith reports, that change could have big implications for investors.


Stacey Vanek Smith: Companies like to go public because selling shares is a great way to raise a lot of money. What they don't like are the costs: They have to disclose a lot of information and deal with regulations.

Private companies are allowed to keep their secrets, as long they have fewer than 500 shareholders. The idea is that only a limited number of wealthy investors would get stung if the company isn't what they thought. Securities attorney Lance Kimmel says relaxing the shareholder cap is risky.

Lance Kimmel: These policies were put in place as methods to protect the general public and ensure that they had accurate verifiable information so that they could make a reasoned decision.

Take Facebook. Wealthy investors clamored for its private shares, sending its valuation soaring, says Kimmel.

Kimmel: I think the danger is that companies can continue to trade based on assumptions about whether they're doing well, hype, people who could start rumors.

Regulators have been under pressure to relax the rules, to help start-up companies raise money fast. But, attorney Marvin Pickholz with Duane Morris says making private shares more accessible undermines stock markets, because it lets companies avoid going public.

Marvin Pickholz: It's almost like creating two markets, one for the so-called big boys and the other's for everybody else to invest in.

Transactions of private shares nearly doubled last year to more than $4.5 billion. At the same time, the number of companies going public has been sliding.

I'm Stacey Vanek Smith for Marketplace.

About the author

Stacey Vanek Smith is a senior reporter for Marketplace, where she covers banking, consumer finance, housing and advertising.

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