As previously reported, securities law requires private companies that exceed a certain level of stock distribution to file quarterly financial data with the Securities and Exchange Commission. Barring any extension or reprieve, the deadline is up next week for Google as the company reaches the end of its first quarter.
As a result, some financial analysts expect that Google will file for a public offering next week to avoid having to disclose closely guarded financial data without the benefit of raising capital. However, the company could file to extend the period in which it has to report financial data.
A Google representative declined to comment.
In the five years since its founding, Google has become the most widely used search engine on the Web, and it runs one of the largest online advertising networks. The company has long been thought to be preparing for an IPO, as many other tech companies have done in recent months.
A private company must report its finances once it has more than 500 common shareholders -- or stock-option holders -- and $10m 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 SEC that disclose operating expenses, profits, partnerships, shareholders and many other details -- a laborious process that can cost as much as $2m annually.
Google 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 familiar with the company 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.
The rule is not likely the largest factor in the company's momentum to go public. More influential reasons 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.
In one sign of a possible IPO, Google has approached investors in companies it has acquired to register their common shares for sale, according to one source. That means that those investors would be able to circumvent a mandatory waiting period of 180 days to trade shares in Google once it goes public.
The section XII(g) 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 $2m (£1.12m) for large companies. Many companies will go public before they have to deal with this reporting standard, they say. In addition, private companies will want the attention from investors that they get by doing a pre-IPO road show, versus disclosing that information to the SEC beforehand.
