The top U.S. securities regulator has formed an advisory panel of fast-growing companies and venture capital funds as it reviews whether it needs to update rules on how private companies can access public investors.

The U.S. Securities and Exchange Commission has said it is examining its share issuance rules for private companies to see if they are still relevant in light of market developments.

The issue jumped into the spotlight recently as Wall Street banks and electronic markets offer investors a chance to buy and actively trade stakes in hot Internet companies such as Facebook and Twitter before they go public.

Lawmakers have also raised concerns about whether the U.S. Securities and Exchange Commission's restrictions on capital raising by private companies hurt innovation and hiring.

A House Oversight subcommittee is holding a hearing on Thursday to explore crowd funding, which would allow investors to take small stakes in private companies, usually over the Internet.

The SEC said on Tuesday the newly formed committee will advise the agency on issues such as capital raising, trading in the securities of fast-growing companies and the public reporting of those companies.

Our capital markets are a critical source of funding for emerging companies and smaller public companies, said SEC Chairman Mary Schapiro in a statement. A key component in our agency's mission is to facilitate capital formation while at the same time protecting investors.

The SEC panel will be composed of private sector representatives, including Karyn Smith, deputy general counsel at Zynga Inc, a California-based game maker for Facebook that has vigorously supported crowd-funding.

Privately held companies are bound by the 500-shareholder rule, which states that once a company has that many shareholders of record -- and at least $10 million in assets -- it must make the same financial disclosures as a public company.

But there are legal ways around it.

Goldman Sachs Group Inc used special purpose vehicles, or SPVs, to aggregate investors and avoid the 500 threshold to allow investors access to invest in Facebook, which is still privately held.

Online private exchanges -- such as Second Market -- also allow investors to buy and trade stakes in companies such as Groupon and Zynga before they go public.

Opponents say these market structures harm retail investors, who do not meet the high annual income or net worth requirements to participate in the online exchanges.

And venture capitalists -- who often profit when companies they invested in go public -- may be harmed by delayed IPOs, while all investors are more vulnerable to fraud, they say.

Other market players are more supportive of strategies that allow private companies more access to capital without being forced to file for an IPO.

Sherwood Neiss of the Startup Exemption says equity-based crowd funding can create 1.5 million net new jobs in the next five years. He will be testifying at the hearing on Thursday, along with Slava Rubin founder of IndieGoGo, a crowd-funding site.

The SEC also said it was in the process of re-establishing an investor advisory committee required under the Dodd-Frank Wall Street overhaul law.

In a statement late on Tuesday, SEC Commissioner Luis Aguilar, a Democrat, said he was disappointed the investor advisory committee has yet to be launched. He added that his vote in support of the small and emerging company advisory board was conditional on the investor advisory committee being launched at the same time.

I firmly believe the SEC should consider the views of the public and all interested parties. This includes small and emerging companies and other entities affected by the decisions of the SEC. Most importantly, this includes investors, he said. I strongly urge that the SEC's Investor Advisory Committee be immediately re-established.

Facebook SEC Twitter Facebook