Congress May Loosen 500-Shareholder Limit

Talk about too little, too late.

Monday, word leaked to CNBC from Facebook sources that paperwork to launch the world’s biggest social network public could come in as little as four months, and that an IPO would likely follow in the first quarter of 2012. Then, earlier today, Fortune reported that House lawmakers are weighing a plan that would substantially expand the number of shareholders a private company can have before it is required to submit documentation with the U.S. Securities and Exchange Commission.

A draft of the amendment to the Securities Exchange Act of 1934 provided to peHUB states the oft-quoted 500 shareholder rule will be doubled to 1,000, and that it will exclude from the headcount “securities held by persons who qualify as accredited investors [or by] persons who received the securities [in an] employee compensation plan.” By this wide metric, a company could remain private for a much longer period of time before it threatened hitting the new go-public threshold.

Naturally, the news means the prospect of extended business for secondary markets primarily dependent on well-known brands to lure traders to their auctions. “The proposed change to the ‘500-shareholder rule’ is an important first step to help growth-stage companies and bolster American global competitiveness,” said Mark Murphy, head of public affairs with SecondMarket. “Modernizing this decades-old regulation would provide companies with the needed flexibility to more readily and cheaply access capital, hire new employees and retain existing ones, and ultimately go public when it makes strategic sense.”

The Fortune report indicated the bill would be jointly introduced by a bi-partisan team, but the only name listed on the draft provided to peHUB was that of freshman GOP Rep. David Schweikert (Ariz.). No firm plan to introduce the amendment has been set up, a source tells peHUB, and the Senate is not yet working on a corresponding version. In fact, coming off a legislative session in which the S.E.C.’s enforcement capacity and lawmakers’ regulatory foresight were both called into question, it is uncertain whether legislators will want to begin relaxing federal financial rules.

Still, earlier this year, the S.E.C. signaled it would respond positively to amending the 500-shareholder rule.

It remains unclear how many companies, beyond the great behemoth Facebook, would be impacted by an expansion of the current shareholder rule. Clearly, it would allow a limited number of late-stage VC-backed companies to linger longer on secondary markets, but independent of any rule change, Facebook CEO Mark Zuckerberg had previously stated his desire to take the company public—and retail investors have demonstrated an appetite for social networking and Internet companies like Facebook. Further, given Facebook’s recent push to hire more Beltway veterans for myriad regulatory and compliance causes, it is unlikely Capitol Hill’s considering amending the 500 shareholder rule caught Zuckerberg off guard.

Where applicable, the bill—should it become law—has one clear beneficiary, and that is the fledgling private stock industry.