Facebook, Goldman Sachs Now ‘Friends’, but SEC Raises Eyebrows

Jack Humphrey, Regulatory journalist
January 05, 2011 /

The much media-celebrated deal between social networking site Facebook and brokerage firm Goldman Sachs Group, Inc. has prodded on Securities and Exchange Commission to take a closer look into how privately held companies disclose their financial statements.

The issue involves the capital infused by Goldman to Facebook, worth $500 million, plus another $1.5 billion to be pooled from investors of Goldman, each of them shelling out at least $2 million. This creates an investment vehicle that permits Goldman investors to buy shares from Facebook without having to be singled out as individual investor. The investment vehicle has caused confusion in the 47 year-old securities regulation, which prompted the SEC to review the way internet companies disclose some details of their financials.

The rule, issued in 1964, compels privately held companies that would reach more than 499 in the number of investors to go public to protect the interest of these shareholders from the scarce disclosure of some financial details. The deal between Goldman and Facebook raises the question of whether the brokerage firm, together with its clients, could be considered as a single investor or should they be treated as individual buyers of shares, thus lifting the exemption of Facebook from the 500-shareholder rule that it obtained from the SEC in 2008.

In 2004, Google went public when its investors exceeded 500 in number.

Though the SEC has not found it violative against the rules at the moment, it will conduct a probe into the investment vehicle hammered by Goldman and Facebook to find out whether the two were trying to circumvent potential scrutiny from regulators into their books.

In addition to investments from Goldman and its clients, Digital Sky Technologies, an investment firm from Russia, also shelled out $500 million for Facebook shares that would eventually give it a little less than 10 percent of stake in Facebook. Furthermore, if the Goldman’s investment vehicle would see through scrutinies, the firm would own about 0.8 percent of shares in Facebook while its clients would acquire pooled shares of 3 percent. Facebook’s CEO and president, Mark Zuckerberg, who was named by Time Magazine as “Person of the Year” in 2010, owns 25 percent of shares.

The fresh investment from Goldman and other investors reportedly made Facebook’s worth to hit $50 billion, bigger than that of Boeing, which is worth $48.7 million, and Time Warner, which is worth $36 billion. But Boeing’s annual advertising revenue is estimated at $64.62 billion while that of Time Warner at $26.5 billion against Facebook’s $2 billion.

 

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