The just-announced formation of a small business advisory committee by the Securities and Exchange Commission may be good news for startup companies hoping to raising more capital without being forced to register with the SEC.

At a Thursday, Sept. 15, hearing, SEC Chairwoman Mary Schapiro told lawmakers that addressing requests to relax a rule requiring companies with more than 500 shareholders to register is the top priority of the Advisory Committee on Small and Emerging Companies. She announced the committee's formation Sept. 13.

"The 500-shareholder rule is the first item on the agenda we hope to bring to the small business advisory committee," Schaprio told the House Financial Services Committee.

Calls to raise the limit have intensified as some of the fastest-growing firms in the country have been forced to seek SEC exemptions to avoid registration and the public disclosure of financials that accompanies it. On Tuesday, Sept. 13, Twitter Inc. was permitted by the agency to issue restricted stock units without running afoul of the agency. Zynga Inc. received a similar exemption earlier this year, and Facebook Inc. received one in 2008.

Raising the limit has long been a priority among the venture capital community and community banks. "We've been pushing this for several years," said Wayne Abernathy, executive vice president for financial institutions policy for the American Bankers Association. "It's reassuring to us that, unlike many ideas we've presented to the SEC, they've not said 'no.' That tells us this idea has legs."

Community banks are concerned about the rule because many small banks are closely held by local investor groups that have no wish to go public. Many of those small banks find the cap prevents them from raising new capital without submitting to the registration costs and the public scrutiny that comes with submitting financials to the SEC.

Proponents of a higher threshold have recommended lifting the cap to between 1,500 and 3,000 shareholders. "A threshold picked in the 1960s is clearly out of date 40 years later," Abernathy said. "We need a discussion about at what point does a company have enough investors that the SEC ought to be paying attention."

Raising the number to 3,000 would reflect a share of the investing public comparable to what 500 represented in the 1960s, he said. An increase to 1,500 would raise the threshold roughly the same percentage as the economy has grown over that time.

Schapiro's comments on the bill came in response to questions from Rep. Blaine Luetkemeyer, R-Mo., sponsor of the Communities First Act, a bill that, among many other things, would raise the threshold to 2,000. The bill also would allow a council of financial regulators to veto Consumer Financial Protection Bureau rules that would adversely impact the financial services industry, amend the Dodd-Frank financial reform law to allow banks to rely on reports by credit rating firms and require the commission to conduct a cost-benefit analysis before approving any proposed accounting change.

Luetkemeyer said raising the cap would "take a little burden" off the overworked SEC staff.

Without commenting on Luetkemeyer's bill and its other, more controversial provisions, Schapiro said the commission is determined to act but is also "moving very deliberately" to determine what the threshold should be. "When the 500 limit was put in place there had been years of study," she said. "It was carefully calibrated and we don't want to just toss it out the window."

On another issue important to private investors, Schapiro indicated she was less willing to act without legislation. Although the SEC has delayed the effective date of a Dodd-Frank mandate for private equity managers to register with the SEC, Schapiro told Rep. Robert Hurt, R-Va., that she is less inclined to exempt PE managers from the rule permanently. Hurt complained that upfront costs of registration range from $750,000 to $1 million and that capital could be better deployed creating jobs.

In June the SEC delayed the registration deadline from July 21, 2011, to March 30, 2012.

She noted that there was a debate in Congress as to whether to exempt PE from registration. Ultimately, only venture capitalists were exempted.

Although the SEC was granted authority to make additional exemptions, she said, "we're very conscious of the fact that Congress made an explicit choice to require registration" of PE managers. "That seems contrary to exercising exemptive authority."