New Law Would End 500 Shareholder Rule, Let Facebook Stay Private | Hacker News Reader

New Law Would End 500 Shareholder Rule, Let Facebook Stay Private

betabeat.com

27 pointsbproper25 comments

> "it would be a fantastic outcome if the SEC decides to allow the general public to be a more active participant in the value creation that happens while companies are still privately held."

That sounds like a complete disaster. The general public isn't nearly sophisticated enough to make wise investments without audited public statements [1]. That's exactly why we have such regulations in the first place.

[1] And even then their capability is in question.

Well, as long as the risks and dangers are known beforehand, I don't see a problem. I hate it when some "authority" tries to prevent me from doing something "for my own safety" - NO, instead, tell me what the risks are, and how can I prepare myself to deal with them, and then let me use my own intelligent mind to make the final decision.

That's like saying, water is dangerous, lets require a swimming licence from anyone who wants to swim.

Besides, your [1] in a way negates your claim - if the availability of public audited financial statements makes no change in the investment capacities of the general average public, then it surely makes no sense to base the permission to invest on that variable.

> "That's like saying, water is dangerous, lets require a swimming licence from anyone who wants to swim."

The problem with your analogy is that a potential swimmer's total knowledge of the water, the difficulty of swimming and so forth isn't held by someone who materially benefits from their ignorance and could materially benefit from exploiting that ignorance.

Caveat Emptor is a fine base-line. But practical experience has shown us that in certain sectors it's not sufficient. Snake oil salesmen can ruin a market by destroying the public's trust.

So it is with investments. SEC rules are generally [1] built on the practical experience of how the market operated without them.

We threw Glass-Steagal away -- an expensively won bit of knowledge about the shortcomings of the 'invisible hand' when it came to people gambling with others' money -- on the assumption that intelligent self-interested experts wouldn't do exactly what they -- almost to a person -- then did. I can't fathom being so eager to repeat that mistake while we're still knee-deep in its debris.

[1] I won't dare use a universal; but I've yet to see a rule that wasn't created as a reaction to a problem in the market. That said, I'm far from an expert on the matter.

I think I see your point, and mostly agree with it. And I think you don't quite see my. (Of course, I might be mistaken, and it might actually be the other way around.)

Consider this example: We have a nice beach. Part of this beach has huge waves, rocky, dangerous shore, and sharks. You, as the authority, have 2 options: 1) forbid swimming for everyone, and 2) warn about the dangers and let individuals decide.

I can see how different people might choose different solutions, but I, don't like others telling me what to do, for my safety.

Of course, if you just leave it like that, the public is going to loose confidence in that beach. But, if you put up warning signs, like "WARNING, very dangerous. Huge waves and sharks! 17 people have already died here this month alone!!!", which are probably going to deter anyone who isn't absolutely sure in what they are doing (or very drunk or very stupid), I don't see how the public might loose its trust. Especially if there is a very nice beach, perfectly safe, with a beach guard, quite near-by.

The problem with this analogy is that it is generally pretty easy to look at the beach and gather the information that there are huge waves and a rocky, dangerous shore (and sometimes even the sharks) and then you are informed. If the only people who can inform you are the ones that are trying to draw money from you, though, it falls under something more similar to consumer protection than it does under closing beaches.

The whole point is that the risks and dangers aren't known beforehand. One of the things that happens when a company prepares to go public is that its financial reporting must meet certain standards. That's how the risks and dangers become known. The phrase that describes this is "financial transparency".

>I hate it when some "authority" tries to prevent me from doing something "for my own safety" - NO, instead, tell me what the risks are, and how can I prepare myself to deal with them, and then let me use my own intelligent mind to make the final decision.

My problem with this approach is that I predict that many who would join you in these decisions are going to lose out. However, you all still retain the right to vote in the future for forms of restitution to be made to you by the government.

So Wall Street gets richer, some of you do well, and I'm at risk of helping support those of you who don't.

Find a way to guarantee that I won't be your insurance policy, then I'll more fully support your right to take risks.

Or, it's a way to ensure that Wall Street gets a (large) cut of any investment made in a startup company by "normal" people. For example, let's take the words of Seymour Cray:

The company raised $600,000 which was a huge amount of money in those days. It was done in a way that we can't do anymore. It was done on the street corner where people would stop by and say "Oh, what are you selling?" And you'd say "Oh, we're selling stock in a new company and its a dollar". And people bought a few dollars here and a few dollars there. There were no large investors in Control Data Corporation. I risked most of my assets. $5,000 dollars I invested which was a huge sum of money. It turned out to be a much bigger sum of money. It is interesting how our protective mechanisms over the years prevented such wild things from happening. Now it takes you six months to get approvals to do start any kind of an operation.

http://americanhistory.si.edu/collections/comphist/cray.htm

For every CDC, I wonder how many scams were perpetrated at the same time.

For every Facebook, I wonder how many startups failed at the same time.

Oh, I guess the only people allowed to participate in high-ROI investments are the rich. We can't have little people competing! It might hurt their margins.

Maybe there's a way to balance the needs of savvy but non-rich investors and legions of suckers.

What is stopping companies from maintaining fixed numbers of shareholders, perhaps with interceding intermediary entities. Example: Company A owns 1% of Facebook and the only purpose of Company A is to be a vehicle for Facebook ownership. Thus, another 500 entities can own Company A stock, in turn owning Facebook stock privately.

That's basically what GS tried to do earlier this year. I don't have the source (it was in an article on HN), and IANAL, but apparently the SEC rules would apply even in such cases, since the intended purpose and effect is the same.

I may be remembering the wrong context, but I recall the question of when somebody/company can be (legally) determined to be acting as an "agent" of another. If you are an agent, the rules continue to apply to the party to whom you are an agent.

One reason shell companies are instantiated abroad.

I wonder how much it cost them to buy this bill.

It's not such a bad bill, really. I personally would hate it if I created a company, got some investors, and then those investors would sell their stock, making the number of shareholders go above 500, and suddenly forcing me to incur all the cost (money and time) of releasing audited financial statements.

Has that ever happened?

Well, as long as the company is private, you can stop that from happening. I have shares in a few private companies, some of which I've invested in, and some of which I earned through work.

Every single one of these had a "right of first refusal" clause in the investment / option / stock grant agreement; If I have a buyer, I must give existing shareholders the option to do the deal at the same conditions -- and they can either take it whole or leave it.

Doesn't make much of a difference for me (once a buyer is available, I'll get the same conditions), but it does let the company -- if it so wishes -- keep the investor pool small, if they pay to play.

Also, having been an entrepreneur and having raised money myself -- 500 shareholders is something you don't accidentally get to before your private company is worth hundreds of millions of dollars. And at that point, you won't care about the cost of releasing audited financial statements - the reason everyone avoids that at that point is that you can't keep your cards secret anymore.

Glad to see Congress tackling the tough issues the US is facing.

I'd gripe about the lameness of the SEC, except that I can mention that back in... 2005, 2007, or so, the SEC was taking in approximately $600 million a year in fees, of which Congress gave them back approximately $100 million for operating budget.

Congress was milking the SEC as a profit center.

The SEC couldn't staff up to take on more workload, because Congress held the purse strings and (mis)appropriated the fees meant to pay for same.

Another example of our "pay to play" business culture.

> The SEC couldn't staff up to take on more workload, because Congress held the purse strings and (mis)appropriated the fees meant to pay for same.

You imply the SEC actually wants to do their job, which is not true, as has been demonstrated by e.g. Markopolos in the case of the Madoff, and many others. The SEC has been captive (in the sense of http://en.wikipedia.org/wiki/Regulatory_capture ) for decades.

I see what you mean about the implication.

It may vary somewhat between the career and the political members. I actually know a fairly senior SEC staff member (although I have my figures separately from news reporting, as best I remember them), and on that basis I understand that there are levels of management that would like nothing more than to be given the resources to be more effective.

As for some (all?) of the people running the show, in my personal opinion (not speaking for this other person), I agree with you.

They don't express it openly, but in my observation I've watched some of this person's hope, or at least enthusiasm when the topic is brought up, dim as the 1000 headcount bump that was promised a few years ago has continued to be delayed, and delayed... and delayed.

(The bump was orginally intended to boost the roles most needed to increase effective regulation. As described, it actually sounded rather positive. I don't know how that may have morphed, in the meantime -- aside from never (yet) coming through.)

How does facebook not have way over 500 shareholders already? They have thousands of employees who I assume all have stock... or do options not count? Not sure how they get around this even with their exemption...

"Staying at 499 shareholders or fewer is something Facebook has worried about since at least 2007, and sidestepped by creating a special kind of restricted stock unit for new employees and making small talent acquisitions that avoided, when possible, awarding start-ups and their investors with Facebook stock." http://allthingsd.com/20110107/with-500-shareholder-concerns...

Thanks.

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