U.S. rules on the trading of private securities will be the subject of a hearing on Tuesday by lawmakers concerned that the regulations may be stifling the formation of capital.
Goldman Sachs, in a high-profile case, was spooked in January into limiting an offering of Facebook shares to foreign investors out of fear that a sale of the private shares to U.S. customers would violate the rules.
Securities and Exchange Chairman Mary Schapiro and SEC corporation finance director Meredith Cross will appear together at the House Oversight Committee after its chairman, Darrell Issa, questioned whether rules governing the trading of private shares are outdated and hinder the creation of capital.
The SEC is analyzing whether its rules for private-share issuances are still relevant in an era of buzzed-about offerings, complex investor pools, and online trading platforms that allow investors to quickly swap hot tech company shares.
Schapiro has not said when or how the SEC may modernize these rules, which have prompted cash-hungry companies such as Google Inc to go public and have dictated how investors can get an early piece of the action.
The SEC is also monitoring the lightly regulated world of private-company share trading on online platforms such as SecondMarket and SharesPost.
SecondMarket confirmed in January that it had received a request from the SEC for information, and its chief executive, Barry Silbert, will also testify.
The trading of private shares has featured prominently in the media lately as Wall Street banks and electronic markets seek to offer investors a chance to actively trade stakes in hot technology companies such as Facebook, Zynga and Twitter before they go public.
INTENSE MEDIA COVERAGE
Goldman had planned to offer U.S. investors a chance to buy Facebook shares but ultimately opted only to sell the shares to foreign investors because of intense media coverage of the deal.
Although the SEC did not ask Goldman to limit its offering, the bank was concerned that media coverage could have violated a general solicitation ban for private offerings that is intended to protect investors.
In prepared testimony, Schapiro said she recognized that some "continue to identify the general solicitation ban as a significant impediment to capital raising."
But she said the ban was also supported by those who say it "helps prevent securities fraud by making it more difficult for fraudsters to attract investors."
"We need to balance these considerations as we move forward in analyzing this issue," she said.
The Goldman-Facebook deal also drew attention to another old rule on the books that determines when a company must go public.
Under current regulations, companies must begin filing regular financial disclosures if they exceed 500 shareholders of record. But Goldman Sachs had found a legal way to get around this rule by using a special purpose vehicle that aggregated investors into one.
Schapiro has said the SEC is looking at these rules to see if they should be modernized.
The SEC is also examining whether regulatory relief should be available for a new capital raising strategy known as "crowdfunding" in which a group of people pool their money together to invest in a business opportunity, she has said.
She has also said the SEC is reviewing the electronic trading of private shares, noting in a letter to Issa that these platforms raise concerns that the "pricing of securities may be influenced by conflicted market participants who may be buying and selling for their own account as well as facilitating transactions" for others.
Issa is expected to raise concerns about the outdated rules and whether they are impeding capital formation.
In a letter to the SEC late last month, he asked for the agency to conduct a cost-benefit analysis of the general solicitation ban and how it affects private issuers with no plan to go public.
He also asked the SEC to loosen its 500-shareholder rule, saying it is creating "unintended consequences that constrain liquidity."
In prepared testimony, SecondMarket CEO Silbert will make a similar pitch, saying loosening the rules will "ease pressure on growth-stage companies."
He called for an increase or elimination of the 500-shareholder rule, and said that the general solicitation ban "unnecessarily limits the pool of potentials investors."
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