SEC Contemplates Relaxing Rules for Start-ups Like Facebook [Updated]

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Did I do that?
Did I do that? Photo: Chip Somodevilla/Getty Images

See, when SEC chairman Mary Schapiro said the agency was looking into secondary markets (where buyers trade shares of private companies), we thought she meant looking into regulating them. Silly us. Based on a review by the SEC sent to Rep. Darryl Issa, it looks like the agency is actually contemplating relaxing decades-old rules constraining how private companies can sell shares without having to disclose their financials. The Wall Street Journal's sources say the changes are likely to include raising the 499-shareholder threshold companies have to stay under (before opening their books) and making it easier for companies to publicize share offerings. Considering that shares of tech behemoths like Facebook, Twitter, and Zynga have been trading like crazy on the secondary markets as all three carefully dance around impending IPOs, this could radically alter the start-up landscape. And just as politicians fret that the lack of companies on the stock market is hurting U.S. competitiveness.

The rule about hitting 500 shareholders was a big push that forced companies that were getting too large to be unregulated into the public market where they had to report on their profit, loss, competitors, etc. If these proposed changes go into effect, companies could stay private and sell to a wider number of wealthy investors (shares in private companies are generally individuals whose individual net worth is at least $1 million). The upside to that is that ordinary investors won't be burned if it turns out Facebook isn't worth the $75 billion its currently trading at on the secondary markets. Any kind of popping sound in the tech bubble will only hurt the rich. The downside is that with that kind of money at stake and the gotta-have-it fever surrounding stock in Facebook — or any start-up that possibly maybe could be the next Facebook — it's dangerous to lessen the amount of public data available.

In order to make up for not catching Bernie Madoff sooner, Schapiro and the SEC have been showing off their newfound aggressiveness all over Wall Street. But the business-cozy agency appears to be heeding calls to "modernize" rules rather than issue restrictions. Here's hoping being the fun parent won't come back to bite them later on.

U.S. Eyes New Stock Rules
[WSJ]

Update: Fortune.com's Dan Primack got a hold of Schapiro's letter to Darryl Issa, the Republican chairman of the House Committee on Oversight and Government Reform. Primack says the 26-page document makes it seem "more like Shapiro opened a door rather than signaled that she plans to walk through it." [Fortune]