Technology

Subscribe to Technology via RSS

As reported in the Wall Street Journal, Facebook, Inc. filed a registration statement with the SEC late Wednesday to register to go public.  This continues the recent trend of established technology companies going public since the beginning of last year.  Whether the stock price ultimately supports its expected lofty valuation remains to be seen.

While the IPO has been long-expected, it is important to remember the reason why Facebook decided to go public: it was required.  Section 12(g) of the Securities Exchange Act of 1934 requires companies that have at least $10,000,000 in assets and at least 500 shareholders as of the end of its fiscal year to register with the SEC.  This shareholder limit has not been adjusted since its adoption in 1964, and causes companies that need to raise capital to face two equally unappealing choices: limit the number of investors to ensure the 500 limit is not breached or register with the SEC regardless of whether being a public company is in the company’s best interests once the limit is met.  While a recent proposed bill in the House has attempted to lessen the burden on private companies looking to raise capital by increasing the shareholder limit from 500 to 1000, to date no legislation has been enacted into law.  The SEC is also reviewing the shareholder limit.

Until Congress or the SEC acts, private companies should consider taking a few safeguards to avoid the requirement to register with the SEC.  First, adopt a shareholders’ agreement that restricts the transferability of the shares.  The transfer restriction will prevent shareholders from subsequently transferring their shares to multiple new shareholders which could cause the company to exceed the limit.  Second, issue stock options to employees rather than shares of stock.  Stock options are considered a separate class of equity security, and since 2007, the SEC has exempted companies from having to register under Section 12(g) because there were more than 500 option holders.  Third, private companies can adopt an insider trading policy that prohibits any employee from reselling their shares.  Facebook adopted such a policy, which effectively eliminated the secondary distribution of its shares.  Fourth, companies can implement high transfer fees to restrict the distribution of its shares similar to the fees
Continue Reading Missed in Facebook IPO frenzy: they had to go public. Here are 6 ways private companies can remain private

The economic events of recent years have hit small companies particularly hard. While virtually everyone has suffered, small companies endured a double hit as they experienced substantial challenges to sales and profitability as well as a widespread inability to raise capital. This inability to raise capital was made worse by these economic events, but the current capital raising regulatory structure was also a major contributing factor. Fortunately these negative events appear to have generated some potential changes in the small company capital raising arena that could be very beneficial. These changes still face a number of challenges, but momentum appears to be building in their favor.

Small companies have historically faced a number of significant regulatory challenges and compliance requirements when raising capital. Some of these problems are the result of outdated compliance requirements that do not reflect the current small company situation. Other problems have resulted from “one size fits all” compliance requirements that do not contemplate the special needs of small companies and the economic restrictions under which many of them operate. The net result has been that small companies have been restricted in many situations in their ability to raise capital. This has been a particular problem in connection with public securities offerings by small companies.

In response to these concerns, several legislators in both the House and the Senate have submitted legislative proposals that are designed to ease the regulatory burdens on small companies in the capital raising process and to ensure that such regulatory burdens correctly reflect small companies’ situations. One significant proposal would increase the offering limits for Regulation A offerings from the current $5 million level to $50 million. Regulation A has been available as an exemption from registration under the Securities Act of 1933 for a long time, but historically it has not been used very often. This is probably primarily due to the relatively low offering limit. Regulation A contains some fairly substantial benefits for issuers, including the ability to solicit indications of potential interest from investors before an offering by use of several forms of media (although state laws may have an impact here). A substantially increased upper limit on Regulation A offerings could be a significant advantage to small companies’ capital raising efforts.
Continue Reading Positive Events in Small Company Capital Raising Arena