Did Facebook just change age-old SEC rules?

Procedures may be altered to to give late-stage private companies more leeway in fundraising

Financial trends and news by Ronny Kerr
April 8, 2011
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By waiting longer than is typical to go public, hot tech companies like Facebook, Twitter and Zynga might be forever changing how business is done in the world of startups.

In an unexpected turn of events, the Securities and Exchange Commission (SEC) may eliminate roadblocks for startups looking to raise large rounds of capital in their later stages, as revealed in a letter to California representative Darrell Issa.

Unexpected because, just three months ago, a new $450 million Goldman Sachs investment in Facebook sparked an SEC inquiry. The deal appeared to bypass rules requiring private companies with 500 or more investors to disclose financial information, as a public company would, by creating a special purpose vehicle allowing multiple investors to pool money under one name.

Now, it’s starting to look like the SEC may do away with the rule entirely, leaving startups to raise increasingly large rounds of venture capital from wider groups of investors. It grants those businesses more flexibility in their growth, but it leaves out ordinary investors waiting in the public market.

While most companies are typically highly reticent to comment on the possibility of an impending IPO, representatives from both Facebook and Zynga have confessed very little interest in going public early. It seems that the new rule for startups is to put the IPO off for as long as possible.

"[Facebook] probably will IPO at some point,” said Peter Thiel, an early investor in the company and a sitting member on the board of directors, last fall. “The lesson from Google seems to be that you don't go public until very late.”

Google waited six years after its founding to go public. Today, Facebook is seven years old.

Zynga, a four-year-old startup and one that bolstered its financial portfolio even faster than Facebook, appears even less ready to consider an IPO.

"I always scratched my head and said, 'Why?' Why on Earth would you go public if you want your company to be sustainable and to last? I get really confused why anyone would go public," proclaimed Mark Pincus, CEO of Zynga, at Vator Splash in February 2010.

We already know these companies are changing the face of the Web, but now they might actually be changing the usual pace of business altogether.

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