December 10, 2003 4:34 PM PST

SEC rule may nudge Google toward IPO

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Google appears to be in no hurry to become a publicly traded company, but a little-known securities regulation might force it to start behaving like one.

Securities law requires private companies that exceed a certain level of stock distribution to file quarterly financial data with federal regulators. If the law is applied to the popular search engine, Google executives would have to disclose the company's closely guarded financial information, and it could ultimately play into the decision on whether or when to take the company public.

A private company must report its finances once it has more than 500 common shareholders--or stock-option holders--and $10 million in assets, according to section XII(g) of the Securities and Exchange Act of 1934. That means a private company must file quarterly forms with the Securities and Exchange Commission (SEC) that disclose operating expenses, profits, partnerships, shareholders and many other details--a laborious process that can cost as much as $2 million annually.

In Google's case, the benchmarks may be meaningful now because the company has grown tremendously in the last year, with expected annual profits in the tens of millions of dollars and more than 1,000 employees. At least 650 of those employees have options to buy shares, sources say, while about one-third of the staff works on contract and does not receive shares.

SEC standards require that qualifying private companies report within four months of the end of their calendar year, which in Google's case is April. Financial analysts expect the company to go public in the spring of 2004.

Google co-founder Sergey Brin has said in the past that the company is in no rush to sell shares to the public. Google representatives declined to comment for this story.

A typically tight-lipped company, Mountain View, Calif.-based Google would not likely disclose financial details without the benefits of raising money at the same time, industry watchers say, so the rule is hardly the biggest factor weighing on its decision to go public. More influential factors likely include demand from investors, the prospect of raising hundreds of millions of dollars to appease venture capitalists and employees, the potential revival of the tech IPO market, and a plan to make acquisitions to fend off rivals.

But Google's founders have been openly reluctant to rush the IPO process because they risk losing some anonymity, privacy and control. Still, the reporting standard could help speed things along.

"It might compel Google to go out earlier than they want, put a deadline on them," according to one corporate attorney who asked to remain anonymous. "It's a pain in the neck to have the burdens of being a public company without the benefits of a publicly traded stock."

The rule was designed to protect shareholders by requiring disclosure of corporate financial information and risks once a company reaches the size and ownership makeup of a public company, corporate attorneys say. But filing reports to the SEC can prove onerous, and many private businesses carefully watch their stock allotments or repurchase shares to stay under the threshold as a result.

If a company falls within the reporting standard, it would have to first file a Form 10, which is a long description of the business and its officers, similar to an IPO prospectus in terms of the amount of detail required. Following that, it would be required to file forms 10K and 10Q quarterly. These forms include a description of the company's business, financials and risks. It also has to file proxy statements and hold shareholder meetings.

The reporting standard also involves a significant added expense. Corporate attorneys say it can cost in the high hundreds of thousands of dollars for smaller companies and as much as $2 million for large companies. Many companies will go public before they have to deal with this reporting standard, they say. Private companies will also want the attention from investors that they get by doing a pre-IPO road show, versus disclosing that information to the SEC beforehand.

In the 1990s, Seagate Technology began filing SEC documents because of this reporting standard, but it went private again afterward. Seagate reentered the public market in December 2002.

Google would not comment on financials or factors that could put it in this reporting category. The company appears to be gearing up to go public, however. In August 2001, it hired former Novell CEO Eric Schmidt to take the reins from co-founder Larry Page as chief executive, and charged him with shaping the company's strategic vision. This year, it hired Wall Street analyst Lise Buyer, and it has reportedly talked to investment banks in recent months about an offering.

 

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