The bill, HR 2167, named The Private Company Flexibility and Growth Act, would amend Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) to trigger public company registration and reporting only at 1000 shareholders of record.

Under the proposed law, the definition of `held of record’ would not include securities held by persons who qualify as accredited investors or securities that are held by persons who received the securities pursuant to an employee compensation plan in transactions exempted from the registration requirements of section 5 of the Securities Act. Likewise, beneficial owners behind the “record owners” would continue not to be counted, just as they are not counted under the current SEC Rule imposing the public company registration and reporting requirement upon companies with 500 shareholders and $10 Million in assets.

The proposed legislation would direct the SEC to revise the definition of “held of record’’ pursuant to section 12(g)(5) of the Exchange Act to implement these changes. It would also require the SEC to adopt safe harbor provisions that issuers can follow when determining whether holders of their securities are accredited investors or that holders of their securities received the securities pursuant to employee compensation plans in exempt transactions, for purposes of this provision.

Enacted in 1964, Section 12(g) of the Exchange Act, as interpreted in rules issued by the SEC, requires companies with more than 500 shareholders of record and more than $10 million in assets to register with the SEC and file annual and other periodic reports which are then available to the public. Under current rules adopted by the SEC under Section 12(g), ultimate beneficial owners of the record holders are not counted in determining whether a company has reached the 500 shareholder threshold.

HR 2167 has been referred to the House Financial Services Committee for review. This means the bill is in the first step in the legislative process. “Introduced bills and resolutions first go to committees that deliberate, investigate, and revise them before they go to general debate. The majority of bills and resolutions never make it out of committee,” according to the legislative tracking service, GovTrack.us.

Meanwhile, as announced by SEC Chairman Mary Schapiro in May, 2011, the SEC is engaged in an ongoing review of current rules relating to public company reporting under Section 12(g) and related regulations relating to private offerings. See our previous report on the SEC’s announcement of its pending review: SEC Reviewing 500 Shareholder Threshold for Requiring Registration as a Public Company.

As we reported, the SEC has formed a committee to review these rules, and we are currently awaiting the SEC’s report.

The announcement was made by SEC Chairman Mary Schapiro in testimony at a hearing on “the Future of Capital Formation” before the U.S. House of Representatives Committee on Oversight and Government Reform on May 10, 2011. Here is a link to a full transcript of Ms. Schapiro’s testimony.

According to a May 10 report in Bloomberg News, the catalyst for the review may have been complaints that the current 500 shareholder limit for private companies is hindering capital for growth of closely held companies, which followed Goldman Sach’s pulling its planned $1.5 billion private funding of Facebook Inc. in the face of intense media attention to questions whether this planned private offering by a public company may violate SEC rules limiting marketing of private securities.

Given that the funds for the proposed Facebook investment would ultimately have come from thousands of public investors in Goldman, a public company, questions were raised whether keeping the offering private and allowing Facebook to continue to operate as a private company, simply by counting Goldman Sachs as a single investor, may violate the spirit of the 500 shareholder rule and the full disclosure policy it was intended to serve. Under these circumstances, many argued that the full disclosure of a public offering and registration of Facebook as a public company should be required.

The current rule requiring companies with more than 500 shareholders and more than $10 million in assets ro register as public companies, was created to ensure that shareholders receive sufficient information about their investments. Currently, the rule counts owners of record toward the 500 shareholder threshold, but does not count the ultimate beneficial owners, the people who invest in the fund making a “private placement” investment.

Others in the securities industry complained that enforcing the requirements of costly and fully transparent public company registration in instances like Facebook is hindering capital raising for private companies, especially since most of the large banks on Wall Street have become public entities with thousands of shareholders. Is the ultimate number of shareholders of such investors are counted toward the 500 shareholder limit, forcing public registrations of all such financings, they argue, this may impede other private company financings like Facebook.

Daryl Issa, Chairman of the House Committee on Oversight and Government Reform that held the May hearing on “The Future of Capital Formation,” voiced these concerns in a statement he published giving his rationale for holding the hearing.

Barry Silbert, chief executive officer of SecondMarket Inc., urged that the 500 shareholder limit be significantly increased or eliminated altogether. In remarks prepared for the House Oversight and Government Reform Committee hearing in May, he said that the shareholder limit “has created a disincentive for private companies to hire new employees, or acquire other businesses for stock, as these private companies are fearful of taking on too many shareholders.”

Silbert’s company bills itself as the largest secondary market for trading alternative investments, which would benefit from an increase in the number of permitted non-public offerings of securities. He said that public markets have become “inhospitable” to smaller firms, because of increased regulatory costs of being a public company following enactment of the Sarbannes Oxley Act of 2002, and also because online brokerages led to reduced demand for research and thereby reduced analyst coverage of smaller issuers.

In a further statement issued in May, Mary Schapiro, Chairman of the SEC, announced that she has asked the SEC staff to review both the number of shareholders that should trigger registration and how those holders are counted, as well as other restrictions on how private firms can solicit investors. She announced that the SEC was forming a committee on small and emerging firms to contribute to the review.

“Companies seeking access to capital should not be overburdened by unnecessary or superfluous regulations,” Ms. Schapiro said in her statement. “At the same time, while we have an important responsibility to facilitate growing companies’ access to America’s investment capital, we must balance that responsibility with our obligation to protect investors and our markets.”

We are awaiting the SEC’s further report and recommendations.