Twitter, Gilt CEOs Fight SEC’s 500-Shareholder Limits on Private Startups

By Douglas MacMillan and Joshua Gallu - Dec 14, 2011 7:40 AM GMT+0700

Twitter Inc., Gilt Groupe Inc. and other Internet startups urged Congress to pass legislation easing financial-reporting rules for closely held companies.

Twitter Chief Executive Officer Dick Costolo and Gilt CEO Kevin Ryan, along with 36 other executives and investors, oppose a restriction that requires closely held companies to disclose financial data when they have 500 or more shareholders.

“The 500 shareholder rule is outdated, overly restrictive, and limits U.S. job creation and American global competitiveness,” the group wrote in a letter yesterday to members of Congress.

The startups are angling to generate support for legislation proposed earlier this year that would increase the limit to at least 1,000 shareholders. Because young companies hire rapidly and try to lure new employees with stock options, the current rules can force startups to go public too soon, said Gilt Groupe’s Ryan. Businesses in that situation may not be ready for public scrutiny, he said.

“The current legislation doesn’t reflect what is going in today’s economy and has unintended consequences,” Ryan, whose e-commerce company is based in New York, said in an interview. “Because companies don’t want to trigger the 500-shareholder rule, the solution they take right now is they stop giving out options.”

While companies with 500 or more shareholders aren’t required to file for an initial public offering, they have less incentive to stay private at that point, because they would have to disclose financial information to the U.S. Securities and Exchange Commission either way.

The new 1,000-shareholder legislation, introduced in June by Representative David Schweikert of Arizona, would exclude employees and accredited investors from the rules, giving startups even more flexibility.

Gilt, with almost 900 employees, expects to approach the 500-shareholder limit within two years, Ryan said.

Matt Graves, a spokesman for San Francisco-based Twitter, declined to elaborate on the letter.

To contact the reporters on this story: Douglas MacMillan in San Francisco at Dmacmillan3@bloomberg.net; Joshua Gallu in Washington at jgallu@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net