A bill introduced in Congress on Tuesday could change the rules governing when technology companies like Facebook and Zynga must go public, allowing them to remain private much longer than currently permitted.
Under current guidelines of the Securities and Exchange Commission, companies must publish their financial details three months after the calendar year in which they reach 500 shareholders, including employees who hold stock in the company. Once they’ve made their financials public, most companies file for an IPO.
US Representative David Schweikert, a Republican from Arizona, says the rule forces companies to go public before they’re ready.
“You don’t know if you have the business model that has matured enough to be truly well received by the markets,” he said, “if you’ve not captured certain market share, if you haven’t developed the intellectual property in your business.”
Mr Schweikert’s bill, HR 2167, proposes extending the limit to 1,000 shareholders, discounting employees who own shares in the company, and discounting certain investors like venture capital firms. The legislative process is slow,though, so the bill wouldn’t become law until the end of this year at the earliest, and there’s no guarantee it will pass at all.
The move comes amidst growing pressure on the SEC to change current rules and interest from technology companies that want more time to grow and become profitable before they file.
“That rule, which may have made sense in 1934 when it was first adopted, really seems not to fit with modern reality, especially in Silicon Valley,” said Joseph Grundfest, a Stanford law professor and former SEC commissioner.
Also, Silicon Valley companies compete fiercely with each other to hire the best talent, with most offering shares in the company as part of a compensation package. That easily puts many companies over the 500 shareholder limit, Mr Grundfest said.
Of course, companies have reasons to go public before hitting the limit, to ride momentum in the market, for instance. And ultimately, it’s not just technology companies, but all small- and medium-sized businesses that Mr Schweikert is aiming to help. He said the bill will give these companies more options for raising the capital they need.
“We’re trying to create some velocity in the economy,” he said. “This is all about job creation and economic growth.”
Mr Schweikert formally introduced the bill on Tuesday, with seven co-sponsors. After reviews by different subcommittees this summer, it could go to the floor of the House of Representatives for a vote by fall, then get passed to the Senate. Given economic conditions and an impending election season, Mr Schweikert’s staff believe the bill could conceivably become law before the end of the year.
