True? When a privately owned company has "too many" investors, it MUST become a publicly traded one?

Factual Questions
1

I wanted to ask this question about ten days ago because it arose from the Facebook IPO circus. However, since I would not be able to respond until now, I delayed until today.

Again, the question:

Is it the case that a privately owned corporation must become publicly owned/traded once its number of private investors exceeds some threshold (the value of which I have no idea)?

I saw the question answered in the affirmative (in an unequivocal way) and then subsequently read a number of screeds that ridiculed that position. A flavour of what I am referring to is found here (about 2/3 of the way down in the post by ‘The Media Lies to You’ made at 7:35 PM on May 17, 2012).

As always, I look to you for the answer.

Thanks!

2

This is liable to vary from one jurisdiction to another but I think that in most cases, although it must not become publicly traded, it must conform to many of the same regulations as publicly traded corporations. For example, it may have to give quarterly reports or draw up a prospectus. In which case, there may be little disadvantage to just going public.

In any case, even if a corp goes public, it doesn’t mean that the corp has to issue more shares or that the shareholders are obligated to sell theirs to anyone but each other or the corp.

3

In the US, a shareholder corporation must comply with all SEC filing regulations once it has 500 or more shareholders. It doesn’t have to actually go public, but it has to do everything a public corporation does with respect to disclosures and regulations. So once you’ve got 500 shareholders you might as well go public anyway.

4

Ah! Thanks.

But why compel a privately held business to do all those things (i.e. either go public or behave exactly as a publicly traded one)? What I and my pals do is nobody else’s business, no (so long as it’s all legal, independent of any laws mandating going public at the 500 investor mark, of course)?

ETA: I assume it is for exactly that reason - to provide data which might demonstrate illegality or, phrased differently, to provide data that proves the corp’s continued legal operation?

5

Yeah, it’s mostly to prevent things like stock scams, ponzi schemes and whatnot. In the old days there were all sorts of shady “businesses” that would sell shares to rubes for 9000% of their equity.

It’s generally assumed that if you’re investing in something with fewer than 500 shareholders, you are a qualified investor capable of doing your own due diligence. Once a company gets more than 500 shareholders, it is considered to be selling shares to the general public (whether via a public stock exchange or not is irrelevant) and so the government requires public disclosures so potential investors can make informed decisions without having to hire their own team of auditors.

6

Thanks for that. I understand but, why not just caveat emptor? Why should a law be required to protect you from your own stupidity or lack of due diligence?

7

Well, hey, you won’t get an argument from me on that one. That’s just the way it is, though.

8

Because by building and reinforcing trust in the system, the market expands and capitalism grows. Consider the number of people who could invest–people with the market awareness and time to do due diligence. Not just read a few things on the Internet (particularly as these laws pre-date the Internet), but thoroughly investigate a company to weed out the very artfully put together scams from real business opportunities.

Now consider the much larger pool of people that can invest if there is a floor of information–standardized information–available to make investment decisions. The vast amount of capital that can enter the market due to such regulations absolutely dwarfs the amount available if a *ce *system was all that existed.

Despite the existence of some absurd and wasteful rules, a substantially regulated market is a good thing for capitalism.

9

That was a very thoughtful, and provocative, reply Rhythmdvl - thank you.

What you said makes a lot of sense. By chance, is there any empirical data to support such a position? For example, are the markets in less regulated countries also less robust? I have no idea but wonder whether earlier Hong Kong markets and maybe even those of some of the ‘exploding’ third-world markets, too, might belie the idea.

Although somewhat cumbersome, perhaps one situation might be to enforce ‘publicness’ only when the number of small investors exceeds some threshold. So, if all or most of a company’s investors are in for, say, a one million dollar minimum, it should not need mandated “openness”.