The Securities and Exchange Commission (SEC) is pondering new regulation that is deemed to make life for entrepreneurs and startups a lot easier. However, a deeper analysis yields that the chances of entrepreneurs and startups truly benefiting is not likely.
Currently, the SEC requires any corporation with more than 499 shareholders to register as a public company. The potential new regulation would lift this 499 shareholder limit and make it easier for companies to remain private.
Proponents of this potential regulation include Carrie Merritt, the director of public relations at Silicon Valley Bank. Ms. Merritt and other proponents stress that forcing companies to go public when they obtain a certain number of shareholders is burdensome because of the large expenses associated with going public. Fewer regulations would mean greater access to private capital, which would in turn increase innovation.
It is understood that going public is very expensive due to SEC filing requirements and fees. The fees to file the necessary paperwork are not cheap. On top of these fees, the SEC requires public companies to release detailed information regarding finances and operations. To prepare such reports, most companies look to CPAs and other experts to analyze the companys position and prepare the necessary reports. Paying experts to make such detailed and technical reports is very expensive, and greatly contributes to the high cost of going public. Thus, allowing companies to remain private also allows them to save money is a valid point.
However, the argument that allowing companies to remain private and access private capital would increase innovation is weak. The weakness primarily lies in the correlation between private companies and innovation. Private companies are not the only companies that house innovativeness. For instance, many public corporations such as Apple, Sony, and IBM are very innovative. Their innovation is constantly seen through the release of their creative and immensely popular products. In fact, it can be argued that since public companies are more likely to have and raise large sums of money, they have the funding to experiment more and create innovative products. Thus, allowing more companies to remain private does not guarantee a greater likelihood of innovativeness. Proponents should stick to the reasoning that allowing more companies to remain private cuts out the large expense of going public.
On the other hand, opponents of the regulation argue that the potential new rule would allow private companies to keep their investors in the dark regarding the companys finances and operations. Additionally, companies that would have gone public would be denied the economic benefits of initial public offerings (IPOs).
Yet again there lies weakness in the logic. Shareholders of private corporations do have access to company information regarding finances and operations because private corporations are required to have Board of Director (BOD) meetings per basic corporate law principles. If a meeting date is not established in the company by-laws, shareholders can request a meeting to take place. BOD meetings usually entail updating shareholders on information regarding the companys operations and finances. Therefore, investors of privately held companies are required to be provided with information so they are not kept in the dark. Thus, the opponents argument proves to be unconvincing.
The economic benefit aspect is the stronger argument for opponents because with IPOs come larger sums of money. Ideally, IPOs allow more people to invest, more company shares to be sold, and hence more money to come into the corporation. More money can allow the company to experiment with more product lines, improve existing products, or expand. All in all, more money gives companies more options for growth and expansion. An SEC regulation allowing for more companies to remain private denies these companies the benefits that accompany public corporations.
Overall, if the regulation passes, entrepreneurs and startups will be saved from the heavy expenses associated with going public. However, they will also lose out on the benefits public corporations enjoy via IPOs. Therefore, the proposed regulation may not substantially harm entrepreneurs and startups; however it does not follow through with any substantial benefits.