The shareholder limit "has created a disincentive for private companies to hire new employees, or acquire other businesses for stock, as these private companies are fearful of taking on too many shareholders," Silbert said in remarks prepared for the hearing.
Silbert, whose company bills itself as the largest secondary market for trading alternative investments, said public markets have become "inhospitable" to smaller firms after online brokerages cut demand for research and regulatory compliance costs increased.
Secondary markets have become more popular as funding sources, in part because requirements imposed by the 2002 Sarbanes-Oxley Act and last year's Dodd-Frank Act have made accessing public markets more expensive. The trend has spawned new exchanges for unregistered shares, including New York-based SecondMarket, San Bruno, California-based SharesPost Inc. and San Mateo, California-based Xpert Financial Inc.
Trading of shares in closely held firms has tripled since 2009 and is likely to rise 51 percent this year to almost $7 billion, according to Nyppex LLC, a New York research and advisory services firm.
Accredited Investors
The investments, which can be riskier than bets on publicly traded stocks, are reserved for so-called accredited investors - - people with at least $1 million in assets or $200,000 in annual income. A basic premise of securities law is that such investors are sophisticated enough to fend for themselves without regulators' protection.
Silbert said the SEC should lift a restriction on general solicitations for investors. What's most important is that shareholders meet the accredited investor criteria, he said.
"I recognize that some continue to identify the general solicitation ban as a significant impediment to capital raising for small businesses," Schapiro said. "At the same time, the general solicitation ban is supported by others on the grounds that it helps prevent securities fraud by making it more difficult for fraudsters to attract investors or unscrupulous issuers to condition the market. We need to balance these considerations as we move forward in analyzing this issue."