

New Law Would End 500 Shareholder Rule, Let Facebook Stay Private - bproper
http://www.betabeat.com/2011/06/14/new-law-sec-facebook-remain-private-500-shareholder-rule-2011-06-14/

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roc
> _"it would be a fantastic outcome if the SEC decides to allow the general
> public to be a more active participant in the value creation that happens
> while companies are still privately held."_

That sounds like a complete disaster. The general public isn't nearly
sophisticated enough to make wise investments without audited public
statements [1]. That's exactly _why_ we have such regulations in the first
place.

[1] And even _then_ their capability is in question.

~~~
tomp
Well, as long as the risks and dangers are known beforehand, I don't see a
problem. I hate it when some "authority" tries to prevent me from doing
something "for my own safety" - NO, instead, tell me what the risks are, and
how can I prepare myself to deal with them, and then let me use my own
intelligent mind to make the final decision.

That's like saying, water is dangerous, lets require a swimming licence from
anyone who wants to swim.

Besides, your [1] in a way negates your claim - if the availability of public
audited financial statements makes no change in the investment capacities of
the general average public, then it surely makes no sense to base the
permission to invest on that variable.

~~~
roc
> _"That's like saying, water is dangerous, lets require a swimming licence
> from anyone who wants to swim."_

The problem with your analogy is that a potential swimmer's total knowledge of
the water, the difficulty of swimming and so forth isn't held by someone who
materially benefits from their ignorance and could materially benefit from
exploiting that ignorance.

Caveat Emptor is a fine base-line. But practical experience has shown us that
in certain sectors it's not sufficient. Snake oil salesmen can _ruin_ a market
by destroying the public's trust.

So it is with investments. SEC rules are generally [1] built on the practical
experience of how the market operated without them.

We threw Glass-Steagal away -- an expensively won bit of knowledge about the
shortcomings of the 'invisible hand' when it came to people gambling with
others' money -- on the assumption that intelligent self-interested experts
wouldn't do exactly what they -- almost to a person -- then did. I can't
fathom being so eager to repeat that mistake while we're still knee-deep in
its debris.

[1] I won't dare use a universal; but I've yet to see a rule that wasn't
created as a _reaction_ to a problem in the market. That said, I'm far from an
expert on the matter.

~~~
tomp
I think I see your point, and mostly agree with it. And I think you don't
quite see my. (Of course, I might be mistaken, and it might actually be the
other way around.)

Consider this example: We have a nice beach. Part of this beach has huge
waves, rocky, dangerous shore, and sharks. You, as the authority, have 2
options: 1) forbid swimming for everyone, and 2) warn about the dangers and
let individuals decide.

I can see how different people might choose different solutions, but I, don't
like others telling me what to do, for my safety.

Of course, if you just leave it like that, the public is going to loose
confidence in that beach. But, if you put up warning signs, like "WARNING,
very dangerous. Huge waves and sharks! 17 people have already died here this
month alone!!!", which are probably going to deter anyone who isn't absolutely
sure in what they are doing (or very drunk or very stupid), I don't see how
the public might loose its trust. Especially if there is a very nice beach,
perfectly safe, with a beach guard, quite near-by.

~~~
masterzora
The problem with this analogy is that it is generally pretty easy to look at
the beach and gather the information that there are huge waves and a rocky,
dangerous shore (and sometimes even the sharks) and then you are informed. If
the only people who can inform you are the ones that are trying to draw money
from you, though, it falls under something more similar to consumer protection
than it does under closing beaches.

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iwwr
What is stopping companies from maintaining fixed numbers of shareholders,
perhaps with interceding intermediary entities. Example: Company A owns 1% of
Facebook and the only purpose of Company A is to be a vehicle for Facebook
ownership. Thus, another 500 entities can own Company A stock, in turn owning
Facebook stock privately.

~~~
tomp
That's basically what GS tried to do earlier this year. I don't have the
source (it was in an article on HN), and IANAL, but apparently the SEC rules
would apply even in such cases, since the intended purpose and effect is the
same.

~~~
pasbesoin
I may be remembering the wrong context, but I recall the question of when
somebody/company can be (legally) determined to be acting as an "agent" of
another. If you are an agent, the rules continue to apply to the party to whom
you are an agent.

One reason shell companies are instantiated abroad.

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bugsy
I wonder how much it cost them to buy this bill.

~~~
tomp
It's not such a bad bill, really. I personally would hate it if I created a
company, got some investors, and then those investors would sell their stock,
making the number of shareholders go above 500, and suddenly forcing me to
incur all the cost (money and time) of releasing audited financial statements.

~~~
beagle3
Well, as long as the company is private, you can stop that from happening. I
have shares in a few private companies, some of which I've invested in, and
some of which I earned through work.

Every single one of these had a "right of first refusal" clause in the
investment / option / stock grant agreement; If I have a buyer, I must give
existing shareholders the option to do the deal at the same conditions -- and
they can either take it whole or leave it.

Doesn't make much of a difference for me (once a buyer is available, I'll get
the same conditions), but it does let the company -- if it so wishes -- keep
the investor pool small, if they pay to play.

Also, having been an entrepreneur and having raised money myself -- 500
shareholders is something you don't accidentally get to before your private
company is worth hundreds of millions of dollars. And at that point, you won't
care about the cost of releasing audited financial statements - the reason
everyone avoids that at that point is that you can't keep your cards secret
anymore.

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chopsueyar
Glad to see Congress tackling the tough issues the US is facing.

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pasbesoin
I'd gripe about the lameness of the SEC, except that I can mention that back
in... 2005, 2007, or so, the SEC was taking in approximately $600 million a
year in fees, of which Congress gave them back approximately $100 million for
operating budget.

Congress was milking the SEC as a profit center.

The SEC couldn't staff up to take on more workload, because Congress held the
purse strings and (mis)appropriated the fees meant to pay for same.

Another example of our "pay to play" business culture.

~~~
beagle3
> The SEC couldn't staff up to take on more workload, because Congress held
> the purse strings and (mis)appropriated the fees meant to pay for same.

You imply the SEC actually wants to do their job, which is not true, as has
been demonstrated by e.g. Markopolos in the case of the Madoff, and many
others. The SEC has been captive (in the sense of
<http://en.wikipedia.org/wiki/Regulatory_capture> ) for decades.

~~~
pasbesoin
I see what you mean about the implication.

It may vary somewhat between the career and the political members. I actually
know a fairly senior SEC staff member (although I have my figures separately
from news reporting, as best I remember them), and on that basis I understand
that there are levels of management that would like nothing more than to be
given the resources to be more effective.

As for some (all?) of the people running the show, in my personal opinion (not
speaking for this other person), I agree with you.

They don't express it openly, but in my observation I've watched some of this
person's hope, or at least enthusiasm when the topic is brought up, dim as the
1000 headcount bump that was promised a few years ago has continued to be
delayed, and delayed... and delayed.

(The bump was orginally intended to boost the roles most needed to increase
effective regulation. As described, it actually sounded rather positive. I
don't know how that may have morphed, in the meantime -- aside from never
(yet) coming through.)

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suking
How does facebook not have way over 500 shareholders already? They have
thousands of employees who I assume all have stock... or do options not count?
Not sure how they get around this even with their exemption...

~~~
falava
"Staying at 499 shareholders or fewer is something Facebook has worried about
since at least 2007, and sidestepped by creating a special kind of restricted
stock unit for new employees and making small talent acquisitions that
avoided, when possible, awarding start-ups and their investors with Facebook
stock." [http://allthingsd.com/20110107/with-500-shareholder-
concerns...](http://allthingsd.com/20110107/with-500-shareholder-concerns-
gone-will-facebook-make-big-acquisitions/)

~~~
suking
Thanks.

