Greenberg: Proposed Stock Rules a Free Market or Free-For-All?

Seriously—I wasn’t sure I was correctly reading a story on this morning about the SEC reviewing whether it should lift the limit on the number of shares private companies could issue without making their financials public.

The U.S. Securities and Exchange Commission seal hangs on the facade of its building in Washington, DC.
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The U.S. Securities and Exchange Commission seal hangs on the facade of its building in Washington, DC.

Currently, companies can keep their data private if they have fewer than 499 shareholders.

Many are employees who received shares as compensation. Others are very early-round nickel-and-dime investors, angel investors and, if the company is large enough, venture capitalists.

But now, according to the story—which cites a letter from SEC Chairman Mary Schapiro to Rep. Darrell Issa—regulators are considering lifting the limit on the number of investors a company can have and still remain private.

With all due respect to the SEC: Assuming what I read is correct—reviewing a change of the rules is prudent; changing the rules would be absurd.

The rules are there for a reason: To attemptto protect investors by making sure they get proper disclosure. It’s one thing if the shares are held by a small group of insiders who know what they have or what they’re getting into. It’s another when the shares start to trade more freely, which is what appears to be happening with in the increasingly active secondary markets.

Limits, of course, are arbitrary. And as times change rules often need to be altered. But where do you draw a line? And when is that line pushed to that point that it blurs what truly distinguishes public from private?

Enter the secondary markets, which catapulted to prominence virtually overnight through active trading in the likes Facebook, Zynga and Twitter. (John Carney at NetNet has done an excellent job covering this.)

This has created an almost instantaneous assault on the market share of the existing exchanges, while at the same time increasing protectionist worries that in a global market companies can remain private by raising cash abroad.

This raises public policy issues, the most obvious of which is: Why should small investors be kept out of potentially lucrative investments?

The answer: That’s what happens in free markets.

Maybe, and I’m all for free markets; I’m just not for a free-for-all.

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Follow Herb on Twitter: @herbgreenberg


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