Legal Developments and Considerations in Business Law for July 2011

Earlier this year Facebook closed a $1.5 billion cash raise, $1 billion of which came through the usage of a special purpose Goldman Sachs investment fund. This allowed Facebook to pool the investment dollars of numerous investors while only recording one holder of record on its books, namely the Goldman investment fund. Some have suggested that, among other things, this was a move by Facebook to remain below the 500 equity holder registration threshold imposed by Section 12(g) of the Securities Exchange Act. A company that reaches this threshold will have to register its securities with the Securities and Exchange Commission and being periodic reporting. The upshot of this requirement forces privately held companies into launching IPOs to get the benefits of being publicly traded now that they are paying the costs. The SEC has traditionally noted that this registration requirement is in place to protect investors and preserve market integrity.

In response to what they believe to be a hindrance to capital formation, Representatives David Schweikert (R-AZ) and Jim Himes (D-CT) have introduced a bill in the House that would bump up the threshold number to 1,000 equity holders in any particular class of security. The bill was introduced in June 2011 and is making its way through the House. As with any change to the securities laws, the goal is to balance investor protection with the legitimate business needs of the issuer. Do the benefits of the new bill outweigh the costs? Find out here.