To connect the SEC news back to AGEL, GATES,
The following letter was sent on January 11th, 2011 to the Securities and Exchange Commission advocating a revision in the number of shareholders of record a private company can have before registration. In the letter, GATE CEO Vince Molinari lays out the case for increasing the 500 investor cap – which has not changed since 1964. As a thought leader committed to the expansion of electronic trading of illiquid assets, Mr. Molinari hopes to proactively engage regulators on this very important issue on entrepreneurial capital formation and begin a discussion that leads to appropriate reform.
Proposal to Amend the 500 Shareholder Limit for Private CompaniesGATE Technologies, LLC and its broker-dealer subsidiary, GATE US, LLC (collectively “GATE”) write this letter to encourage the Securities and Exchange Commission (the “SEC” or the “Commission”) to amend the shareholder threshold under Section 12(g) of the Exchange Act of 1934 (the “Exchange Act”) of 500 security holders. We offer the following comments in the hope of promoting a solution that will best serve the capital formation process, promote economic expansion and job creation.
I. Background
Section 12(g) dictates the circumstances under which an issuer must register as a public company with the SEC and comply with the Commission’s periodic reporting requirements. This section requires registration if a company has more than $10 million in assets and more than 500 shareholders of record (the “500 Shareholder Limit”). While the asset size parameter under Section 12(g) has been increased from the initial $1 million level set in 1964 to $10 million in 1996, the 500 Shareholder Limit has not been revised since 1964. In the four decades since the 500 Shareholder Limit was adopted, the number of private companies and the number of investors in the markets has grown dramatically.
This trend is now testing the 500 Shareholder Limit due to the rise of trading in the secondary private equity market. Private companies, even if not at a stage in their growth cycle that necessitates public market financing, are facing the challenge of raising capital while complying with the 500 Shareholder Limit or facing the costs and burdens of going public. In some cases, it appears private companies have attempted to limit the growth of their investor base by charging substantial fees to discourage the transfer of shares. An unintended consequence of this problem is a disproportionate burden on small shareholders who may seek liquidity.
Creative investment firms have launched special-purpose investment vehicles to consolidate multiple potential investors into one shareholder of record, thus exposing issuers to the risk of a forced public offering if the SEC deems the investors in the vehicles to be shareholders of record of the company. Regardless of how these special purpose entities are treated from a regulatory perspective, there is a clear demand for private equity from a large and diverse group of accredited and institutional investors. We believe this demand will result in a greater number of private companies being challenged to raise growth capital while not violating the 500 Shareholder Limit.
Since the limit was adopted, major technological advances have allowed companies to experience rapid growth, allowed investors to find and research private investment opportunities, and given regulators the ability to more closely monitor private market transactions. These changes have prompted many interested parties to raise the following question: As the private equity market evolves and centralized marketplaces offer more transparency, should the 500 Shareholder Limit be raised to allow private companies greater access to capital, while employing a reporting model to which institutional and accredited investors are accustomed? GATE believes that the answer to this question should be in the affirmative.
II. Amending the Shareholder Threshold is Required to Promote Economic Growth
Private companies are critical to the U.S. economy and their ability to access capital is an important driver for growth, job creation and government tax revenues. However, the high costs of regulatory compliance associated with the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) are limiting the ability and benefits to smaller private companies of going public. These smaller companies are seeking new methods of capital formation, and looking increasingly to private market funding alternatives, while the public market’s appetite for new listings has waned. Initial public offerings (“IPOs”) have decreased significantly while average deal sizes have increased which may indicate that smaller companies appear to face increasing challenges in going public. For example:
•IPOs raising less than $50 million have dropped from approximately 80% of offerings in the 1990s to approximately 20% of offerings since 2000 ; and
•The 1990s saw more than 500 IPOs annually on average (during and before the internet bubble), while 2008, 2009, and 2010 combined have seen a total of 248 IPOs.
Mitigating against the above trends, new trading platforms, such as the one operated by GATE, offer small private companies and investors an increasingly transparent model to access capital. As these platforms become more broadly accepted, they will also become increasingly robust and transparent through technological advances.
Recently, the spotlight has fallen on the private equity market due to investor demand for private companies such as Facebook, Zynga, and Twitter which operate in the public sphere due to their size and commercial presence. Smaller private companies, however, are looking to emulate the private financing model employed by these companies while attempting to manage the growth of their investor base to comply with the 500 Shareholder Limit. When the 500 Shareholder Limit was established in 1964, the Commission could not have anticipated the technological changes that have transpired since that time. These advances not only allow small companies to grow rapidly, but also bring more transparency and confidence to the financial markets.
It can be argued that the rise of secondary private equity trading, driven by new bulletin boards and platforms that allow accredited investors and institutions to buy and sell private equity, has opened the private market to a wider potential investor base than was imagined when the 500 Shareholder Limit was adopted. The result is a significant, unforeseen shift in the private equity landscape that has produced:
•Easier access to high-growth investments for smaller investors;
•Increased challenges for private companies to maintain a shareholder base of fewer than 500 owners, regardless of the desire or need to go public; and
•Private equity valuations that are driven by real transactions in the secondary market.
We believe that the evolution of the private equity market is unlikely to stop and more issuers will inevitably be impaired in their ability to raise capital in compliance with the 500 Shareholder Limit. Historically, the U.S. economy has relied on small, private businesses to drive innovation, growth and job creation. In an increasingly competitive global economy, following the most severe economic decline since the Great Depression, the substantial burdens created by the costs of going public under Sarbanes-Oxley are exacerbated by the outdated 500 Shareholder Limit.
In addition, opaque trading practices that necessitated the adoption of the 500 Shareholder Limit in 1964 have been addressed by innovative trading platforms such as the one developed by GATE, that provide the necessary level of transparency for a competitive private equity market. Finally, technological advances have resulted in a much higher level of regulatory supervision of private markets than was possible in 1964.
III. Conclusion
GATE believes that while the 500 Shareholder Limit played an important role in preserving the integrity of the financial markets, the rule would benefit from review and should be amended to reflect the dramatic growth in the number of private companies and the number of investors in such companies since the rule was established. Amending the 500 Shareholder Limit is now possible in light of the development of new, technology-driven trading platforms. These platforms provide a suitable level of transparency for sophisticated investors and the SEC.
We encourage the SEC to address this issue as promptly as possible in order to spur the capital formation process and the growth of small private companies. We hope that you, the Commission and the staff find these comments useful and productive toward the review of the 500 Shareholder Limit. As the operator of a trading platform designed to address some of the issues facing small private companies outlined above, we would welcome the opportunity to open a dialogue with the SEC to address how the 500 Shareholder Limit may potentially be amended and enhanced.
Very truly yours,
Vincent R. Molinari
Chief Executive Officer
AI
