When most private companies reach 500 shareholders, they trigger an SEC rule which effectively treats them like a public company and requires them to some of the same reporting requirements. Google ran into this issue just before it went public. Now Facebook is quickly reaching that same threshold as it continues to hire and allows employees to sell shares to outside investors.
But in a letter dated October 13, 2008 (embedded below), Facebook’s lawyers argue that rule should not apply to Facebook because most of the shareholders are employees. The SEC granted the exemption.
So Facebook can keep issuing both restricted stock and options to new employees without fear of triggering the (costly) reporting requirements. As long as most of those shares stay inside Facebook, the company should be all right. But if enough employees take advantage of its program allowing them to sell shares to outsiders, and the number of outside investors grows beyond a handful or a few dozen, the SEC might want to revisit this decision.