The internet has been all atwitter over Facebook. With the recent announcement that Goldman Sachs is trying to raise $1.5 billion in equity capital through its own investors, talk of a Facebook IPO has resumed, as the company may reach the 500-investor threshold, at which point it would have to disclose financials. According to a blog post at Corporate Secretary, a corporate governance publication, being able to stay mum on financials is “one of the main reasons a lot of companies choose not to list on an exchange. But this premise may be about to change following a new placement of Facebook shares.”
According to the post:
I heard that the SEC has some concerns about the level of information available to potential investors. A lot of people, including me, would say ‘This is a private placement that Goldman is selling to one of its large clients’ and it is up to that client to satisfy itself on the details. It really doesn’t have anything to do with the SEC. And you would be right.
But, “the devil is in the details,” it seems, and how Goldman Sachs structures the deal could have a significant effect on whether Facebook has to disclose. If the investors use a single vehicle, that vehicle becomes the investor in Facebook. And, it is only one investor, regardless of how many people put cash into it.
In the corporate governance space, this isn’t sitting well, as it leads to a wide loophole.
Corporate Secretary explains:
According to a recent WSJ article, Facebook currently has five classes of stock each of which can accommodate up to 499 investors before triggering disclosure requirements. So what is to prevent them and their bankers from creating further special purpose investments? Nothing really.
This is pretty standard in the private placement space, but the SEC appears to be less than thrilled with this development and is eyeing the Facebook/Goldman Sachs deal. As the private equity world becomes increasingly public, especially with organizations like SharesPost creating platform for pre-IPO liquidity, it’s likely that there will be market and regulatory growing pains.
Disclosure: Tom Johansmeyer is Group Marketing Director at The Cross Border Group, which publishes Corporate Secretary magazine.