May 08, 2012 Articles

Staying Private Avoids SEC, but Not All Regulation

Companies that stay private may avoid making disclosures about themselves to the public, but those that broaden their circle of investors still face significant risk.

By Matthew J. O'Hara

In January 2011, Facebook announced it would raise $500 million in capital while remaining a privately held company. Even though Facebook later decided to go public, this investment was widely viewed as a sign that major private companies believe they can raise large amounts of capital while remaining private. There is much debate over why such companies would remain private rather than go public.

Some suggest that Congress has over-regulated companies with publicly traded securities, making the costs of going public outweigh the tangible and intangible rewards. See, e.g.,Michael Helft, “Facebook Deal Offers Freedom From Scrutiny,” New York Times, Jan. 3, 2011. But much of the discourse revolves around whether the Securities and Exchange Commission (SEC) will continue to allow major private companies like Facebook and Twitter to raise capital by going to a wide circle of well-heeled investors—such as a Saudi prince who recently invested $300 million in Twitter—without being subjected to regulatory oversight. Congress recently enacted a change to the Securities and Exchange Act of 1934 that increases the number of investors at which a company must register its securities with the SEC from 500 persons to either 2,000 persons or 500 persons who are not accredited investors. 15 U.S.C. § 78l(g).

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