Why the 500 shareholder rule matters to private equity

July 21, 2011, 8:32 PM UTC

A new bill aimed at tech start-ups could also have an impact on big tech companies acquired by private equity.

Last month we reported on proposed legislation that would effectively evicerate the 500-shareholder rule, which requires private companies to publicly disclose financial information once they have in excess of 500 shareholders (which, in most cases, effectively pushes them onto public exchanges).

Most discussion of this issue has revolved around Facebook and other privately-held, VC-backed Internet companies. But yesterday I heard a new twist from Adam Clammer, head of technology investing at KKR.

He said that the 500-shareholder rule becomes problematic in the types of companies he buys, because it artificially limits the number of employees who can receive stock. Not an issue for KKR when it buys a Midwestern manufacturing company, but certainly an issue if it buys – or wants to buy – a large technology company in Silicon Valley (where most employees expect equity).