Facebook headquarters in Palo Alto, Calif.A few months ago, I had lunch with a prominent technology venture capitalist. Like many other VC leaders, he was focused on businesses growing in China, but he was adamant that his Chinese portfolio companies not list in the U.S. -- and with good reason.

For small-cap tech companies, he explained, the U.S. has become an undesirable and difficult place to list. Sarbanes-Oxley regulations are costly to fulfill. Institutional investors are gun-shy. And analyst coverage has contracted enormously, making it harder for small companies to get on the radar of institutional investors, many of whom rely on sell-side analysts for basic screening and information.

Yes, there is some cachet left to listing on the Nasdaq, the storied home of U.S. tech issues. And any comparisons are unfavorably colored by the IPO frenzy of the dot-com era. Regardless, this VC told me, the U.S. is simply no place for a small company to go public. Other VCs echo this sentiment.

The 500 Shareholder Rule

Apparently, the point applies to large companies as well. Facebook's deal with investment bank Goldman Sachs (GS) is likely a sign that the social networking giant wants to raise money -- but without dealing with all the headaches that come with having publicly traded shares.

There is some controversy over the rule of 500 shareholders and whether the Securities and Exchange Commission will enforce regulations that say companies with more than 499 shareholders must publicly disclose some financial information. (Facebook has likely crossed this threshold.) But the SEC has yet to force a company to go public, and it probably won't do so anytime soon.

In the meantime, secondary stock markets like SharesPost make it possible for even large pre-IPO tech companies to let off steam by allowing employees to sell shares and realize liquidity. LinkedIn, Twitter and Foursquare employees have all participated in these markets to some degree.

These factors combined mean not only small companies but also relatively large startups, like Facebook or Groupon, can avoid biting the IPO bullet. Some of this reluctance, for sure, stems from founders not wanting to get the special treatment reserved for the executives of publicly traded firms.

However, the upshot is clear. Look for longer and longer waits before IPO announcements, even as a logjam of big, IPO-worthy tech startups piles up. Smaller tech companies in particular will be setting their sights on less regulated, more friendly stock markets.

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January 04 2011 at 8:21 PM Report abuse rate up rate down Reply

Another DOT.com bubble compliments of Goldman Sachs? What we run out of CDO's and foreclosed homes. OR is it that the threat of Ron Paul taking Barney Franks job scare the crap out of you Wall Street.

January 04 2011 at 11:32 AM Report abuse rate up rate down Reply

Why does the stock market have corrections every once in awhile? It's the fallacy of the numbers game. A company's market capital is calculated by the sale of a few shares, instead of by the average sales of all shares. So, you have a company with 1 billion shares, and when a share is sold for $10, the market capital is $10 billion, despite the rest have not changed hands. That's so wrong.

The stock market can go up 15% despite the national GDP only grows by 1%. How do you account for the over priced stocks from that numbers game? When the shops close at the end of the day and when you check the inventory, eventually the stock market has to make corrections to compensate for its "numbers' game."

The stock market may be corrected eventually, but the con man has already spent his steals.

January 04 2011 at 10:38 AM Report abuse rate up rate down Reply