The Facebook 500 and a Quicker IPO?

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Last week, Facebook made headlines after an interview with the company's CEO Mark Zuckerberg in the Wall Street Journal once again demurring when it came to discussing his initial public offering plans.

Still at least a year away, it sounded.

There was also follow-on coverage that placed a pretty staggering valuation on the company, anywhere from $11 billion to $100 billion depending on whom you talked to.

But one of the investment community's biggest guessing games may be coming to a close faster than you think, and you can thank the so-called "500 investor rule." You're probably aware of this: a company exceeds 500 individual investors and has more than $10 million in assets and it has to file its financials with the Securities & Exchange Commission. That rule was one of the keys to encourage Google to file for its IPO when it did, figuring it had to pull the curtain back anyway, so why not just go public.

Further, companies with 500 investors have 120 days after the end of their fiscal years end to file, and since I've confirmed that Facebook is on a calendar year, if the company has tripped this rule, it has until April 30 to file.

I talked to a Facebook spokesman late Friday and he assures me the company "is comfortable that it hasn't tripped the 500 investor rule." Part of the confidence comes from the fact that Facebook uses Restricted Stock Units that don't transform into shares until the company files an IPO. But the RSU plan was only implemented in 2008. As late as 2007, Facebook was still granting stock options, and to date, several hundred people own them.

Facebook might further be emboldened by an SEC exemption granted the company in October, 2008, but even that exemption might come under question. Facebook's argument for not adhering to the 500 investor rule was that the stock they issued was "restricted" and only owned by Facebook insiders. In its letter, as first reported by BusinessWeek at the time, Facebook said that it "anticipates that it could in the future have more than 500 holders" of its restricted stock, but since only insiders were getting the equity, and they weren't paying for it, there was no need to meet the SEC disclosure rules. The SEC seemed to agree and said the company wouldn't have to file financials based on the claims it made in its request.

But times have changed since then.

The secondary market in pre-IPO shares, specifically Facebook, has mushroomed over the past year. Web communities like and both report huge action in Facebook shares. I spoke to the CEO of, Barry Silbert, this morning, and he says in 2008 and 2009, there was roughly $60 million in Facebook trading. During just the first two months of this year, he tells me the number is $65 million, accounting for about 50 percent of transactions on his site. That's staggering. Facebook trading has done in just two months of this year what it did for all of last year. And while some of that buying and selling is done by existing Facebook insiders, it's clear that Facebook stock is now actively circulating inside a much broader audience. That could mean the SEC might want to take a second look at the secondary markets to see just how many investors Facebook really has.

SecondMarket's Silbert tells me his site is very company friendly, helping firms manage trading so they can prevent tripping the 500 investor rule. He says his site is a great way companies can unlock value for their employees and investors while also keeping a close watch on how many there are. Sounds good to me if SecondMarket was the only game in town. But it's not. And unless Facebook is keeping a close eye on the overall secondary market and tracking every share, I'm not sure how comfortable this company really can be when it comes to avoiding that 500 rule.

I'd get it if there were only a dozen or so insiders at Facebook as of 2007 who held options and who were buying and selling shares. But with several hundred out there, and Facebook share-trading growing exponentially in the secondary markets, we may be seeing far sooner than later this company cracking open its ledgers for a peek inside. Right now, investors are essentially flying blind. We've gotten hints at Facebook's valuation before, first from the Microsoft investment, and then of course more recently from the $200 million infusion from Russia's Digital Sky. But by and large, Facebook's true value has been elusive.

And so has its IPO plans.

Tripping the 500 rule could go a long way toward getting both those questions answered. Facebook may not want to release its financial data. But if these trends continue, it may not have a choice.

Questions? Comments?