New US disclosure rules will affect some companies

Only a handful of companies could potentially be affected by proposals to lift the 500-shareholder trigger on disclosure rules for private companies, according to market participants. The National Venture Capital Association estimates there are fewer than a dozen companies that would be directly affected by altering the existing rule, which says that any company with more than 499 shareholders must file public financial statements with the US Securities and Exchange Commission. An effort is under way in the US Congress to create a new rule. A bill introduced in the House of Representatives financial services committee would raise the number of shareholders triggering the requirements to 1,000. It would also exempt employees and accredited investors, who are individuals with more than $1 million (Dh3.67 million) in net assets, excluding the value of their home. Supporters of the bill say the US does not provide enough capital to start-up companies, citing a dearth of initial public offerings. The number of venture-backed companies to go public has decreased from about 150 a year in the mid-1990s to roughly 70 a year in 2010 and 2011. That has led to an increase in trading volumes in secondary share markets for private companies that are not going public, which has some companies concerned they would cross the shareholder threshold sooner. "What's happening is that companies are staying private much longer. More of the existing shareholders need liquidity," said Dave Weir, chief executive of SharesPost, a secondary market for private shares. But many in the venture capital community, including the NVCA, do not believe that a parallel private market will significantly increase the amount of capital available. Paul Deninger, a managing director at Evercore who advises private companies and works on market reforms with the NVCA, said: "Relief on the 500 rule is helpful, but it isn't going to solve the heart of the problem." Sa'ad Khan, a partner at venture capital firm CMEA Capital, said: "This issue really is only applied to a handful of companies." Many companies already avoid the problem by issuing options, rather than direct share grants. In 2008, the SEC said it would exempt stock options given by Facebook to employees from the 500 limit. This relief has been extended to other companies as well. Advocates of further reform say with companies staying private longer, more employees are exercising those conversions and trying to exchange those shares in secondary markets. Late funding exit However, some of the biggest private shareholders, founders and other early executives, are using late funding rounds to exit. Groupon's founders, for example, sold some shares in the company's final round of private funding earlier this year. Additionally, SEC rules do not count funds that hold those shares as more than one shareholder. Keating Capital, a closed-end fund that invests directly in pre-IPO companies, has 3,000 shareholders. For each of the eight companies it is invested in, it counts as just one shareholder under SEC rules.