A privately-traded Facebook

January 3, 2011
Dan Primack thinks it's a possibility, and I'm inclined to agree.

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Is Goldman Sachs going to start trading Facebook shares before they even go public? Dan Primack thinks it’s a possibility, and I’m inclined to agree.

We’ve already learned, from the NYT, that Goldman has put together a plan for creating a tradeable company:

In a rare move, Goldman is planning to create a “special purpose vehicle” to allow its high-net-worth clients to invest in Facebook, these people said. While the S.E.C. requires companies with more than 499 investors to disclose their financial results to the public, Goldman’s proposed special purpose vehicle may be able get around such a rule because it would be managed by Goldman and considered just one investor, even though it could conceivably be pooling investments from thousands of clients.

Such a vehicle would hardly be unprecedented: there’s even a company called Felix Investments which has already done something very similar. But the difference with the Goldman vehicle is that Goldman, being a broker-dealer, could easily start pitching its vehicle as something to be traded, rather than as a simple buy-and-hold investment in Facebook.

Since you need to be rich and special to become a Goldman client and therefore eligible to invest in this vehicle, let’s call it Status Upgrade. Status Upgrade will then buy 30 million shares of Facebook for $1.5 billion, and issue 30 million shares of its own to its investors, all Goldman clients. Status Upgrade will be a firm which invests in other firms, a bit like Berkshire Hathaway, except it won’t be publicly listed, and it will only invest in one company, Facebook.

Goldman will then act as a middleman between its clients who want to buy and sell shares in Status Upgrade. Because they’re shares of Status Upgrade rather than of Facebook, Facebook itself doesn’t have a right of first refusal to buy them back, and trades can happen at any time, rather than only during intermittent auctions on SecondMarket. As such, the secondary market in Status Upgrade shares would probably be much more liquid than the current secondary market in Facebook shares. (This is also a function of the fact that Status Upgrade will have a large market capitalization of somewhere between $1.5 billion and $2 billion.)

The more active the trading in Status Upgrade shares, the more accurately that Goldman will be able to price any future Facebook IPO. And meanwhile, shareholders in Facebook might be able to swap out their shares for new shares in Status Upgrade, thereby trading increased liquidity for decreased voting rights.

Henry Blodget, looking at the Status Upgrade shareholders, isn’t happy:

Does this new system–private IPOs only for Goldman clients–improve our financial markets? Are we–and you–better off now than when more companies wanted to go public and public-market investors were free to make their own decisions about what firms they wanted to invest in?

Specifically, is the economy better now that you are prevented from considering investments in small, speculative companies–and smaller companies have fewer and more-expensive ways to raise capital?

Certainly not from where we sit.

This doesn’t make a lot of sense: Facebook is not a small company by any stretch of the imagination, certainly not compared to genuinely small and speculative companies which are having public IPOs. But if multi-billion-dollar companies start trading in a shadowy private market accessible only to Goldman clients and which doesn’t have to comply with stock-exchange rules about reporting prices and the like, then we lose the level playing field and sense of equal opportunity which is afforded by public markets.

Back in 2007 I was saying that “the move from public and transparent markets to private and opaque markets is more than a blip,” and I still think that way: Facebook seems to be going out of its way to avoid public scrutiny.

To John Cassidy, this is a sign that Goldman is “trying to twist the securities laws for the benefit of itself and one of its clients” — the securities law in question being the one which says that once a company has more than 499 shareholders, it needs to disclose a lot more information about itself to the public. But as Dan Primack notes, Facebook has decent reasons to go down the private-exchange route even if it complies with all those disclosure rules:

This investment will not necessarily precipitate a Facebook IPO—even if the SEC finds the company in violation of the 500-shareholder rule, and requires it to publicly disclose financial information. Facebook clearly has no need for capital (a prime motivator for IPOs), has plenty of liquidity options for existing shareholders and still could avoid many public company hassles outside of the financial filings (no need to meet with analysts or hedge funds, do quarterly earnings calls, etc). In fact, one even could argue this deal makes an IPO less imminent.

It’s an intriguing possibility. Primack reported last week that Facebook is probably already in regulatory compliance, after more than a year of having David Ebersman as its CFO. Rather than rush to an IPO the minute that it breaks the 500-shareholder barrier, it could continue to allow its shares to trade on Goldman’s private exchange more or less indefinitely. Mark Zuckerberg clearly has no desire to run a public company, and he might be tickled by the idea that shares in Facebook, like his personal information on Facebook, are available only to a certain group of friends. The SEC can force him to disclose certain corporate information. But it can’t force him to go public.


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