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Exclusive: New stock rules proposed

June 14, 2011: 6:26 AM ET

Private companies may be allowed to stay private longer.

Congress may soon change the law that is compelling Facebook to go public in early 2012, Fortune has learned.

Reps. David Schweikert (R-AZ) and Jim Himes (D-CT) are among those who plan to introduce a bill that would amend the Securities Exchange Act of 1934. According to a draft copy, it would:

1. Expand the so-called "500 shareholder rule" to 1,000 shareholders. This rule currently subjects any private company with 500 or more shareholders to reporting requirements that are similar to those of public companies. So similar, in fact, that most companies go public once breaching the 500-shareholder threshold. Google (GOOG) reportedly went public in 2004 after doing so, while both Facebook and Zynga are expected to go public within the next year for the same reason.

2. Exempt employees from the shareholder count. Under current law, any employee holding stock granted via a compensation plan is counted toward the 500 shareholder limit. The new bill would seek to change that.

3. Exempt accredited investors from the shareholder count. "Accredited investor" covers a wide range of investors, from institutions like venture capital firms and mutual funds to individuals whose net worth exceeds $1 million at the time of investment. Such investors currently are included toward the 500 shareholder limit, but the new bill would seek to change that. Still counting toward the limit would be unaccredited investors, including many community banks and certain family and friends of entrepreneurs.

The proposed bill is just three-pages long (doubled-spaced), but packs a serious punch.

Broadly-speaking, it would allow most any VC-backed private company to remain private indefinitely. Not just hot Internet companies like Facebook, but also the glut of IT and biotech companies that have grown up without a readily-available public market. Most of these companies ultimately will opt for IPOs due to the corresponding access to capital markets -- or will get acquired -- but the company would be able to choose the timing, not regulators.

"This is a recognition that the IPO market has changed forever," says Barry Silbert, founder and CEO of SecondMarket, a company that helps accredited investors trade shares in private companies. "The public markets right now only work well for companies of a certain size and type of profile. The way to support these companies is to give them the flexibility to manage their own future."

SecondMarket has been pushing for this type of legislation, and clearly would benefit if companies like Facebook and Zynga keep trading privately for another couple of years. But Silbert says his support for the bill is deeper than SecondMarket's bottom line: "We got into this business for the sole purpose of creating liquidity for well-known companies, but have learned over the past 12 months that there is a need for a new growth capital market in the U.S."

Sources tell Fortune that the bill currently has six co-sponsors in the House, including four Republicans and two Democrats. The SEC also has signaled some tacit support for the overall goal, based on this letter from chair Mary Shapiro to Rep. Darryl Issa (R-CA) back in April.

There is not yet a corresponding Senate bill, which means the most optimistic case for adoption would be several months from now. That slow Capitol Hill pace may be too late for Facebook, which reportedly plans to file IPO papers this fall for an early 2012 offering. It is possible, however, that the social network could request a temporary exemption from the SEC, were this bill to be on track for a vote.

We reached out to Rep. Himes, but have not yet heard back. We've also been in touch with a representative for Rep. Schweikert, and are hoping to speak with him later today.

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About This Author
Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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