Saturday, April 2, 2011  Accidentally "Public" - Private
Companies: Watch Out for the 500 Shareholder Rule  There has
been a trend for domestic companies to remain private longer
instead of rushing to an IPO (good recent example is Facebook).
It is not surprising, given the high costs associated with legal
and accounting compliance. Also, there is now a way to obtain
financing and provide liquidity in the secondary market without
being public. For example, this can be done through companies
like SecondMarket, which provide a trading platform for resales
of stock and other financial instruments issued by private
companies.  There is a concern, however, that companies may
accidentally become “public” by triggering the 500 shareholder
rule. This may happen if, for example, shareholders grant or
sell some of their shares to others, thus increasing the total
number of shareholders. It may be difficult for a company to
control, unless it imposes stringent buy-sell restrictions in
its shareholders agreement.  The 50