Goldman’s Facebook plan falls apart

By Felix Salmon
January 17, 2011

When the news came out that Goldman Sachs was orchestrating a private offering of Facebook shares at a $50 billion valuation, those shares overnight became an even hotter commodity than they had been up to that point. Check out the results of the periodic SecondMarket auctions: the three auctions in December, before the Goldman news was public, cleared at between $21.01 and $22.75 per share. The first auction after the Goldman news, by contrast, cleared at an all-time record of $28.26 per share — that’s a valuation of over $70 billion.

Clearly the Goldman news moved markets — a lot. And equally clearly, that’s very problematic in terms of securities law. Andrew Ross Sorkin explains why Goldman now feels forced to restrict its offering to non-US investors:

Federal and state regulations prohibit what is known as “general solicitation and advertising” in private offerings. Firms like Goldman seeking to raise money cannot take action that resembles public promoting of the offering, like buying advertisements or communicating with media outlets.

This is a point which was made before Goldman’s latest announcement, for example by Chris Whalen:

Look, for example, how the Facebook portal got a lot of ink last week because of the superlative public relations job by GS. In feeding their “private investment” hype to the Big Media, GS was effectively front-running their own private market, the little ghetto called Face Book that they created apparently to evade securities laws.

All of this serves to underline the difficulties inherent in trying to put together a private market in Facebook stock. In Goldman’s ideal world, and quite possibly in Facebook’s ideal world too, Goldman could broker private transactions in Facebook shares for years to come, obviating the need for Facebook ever to go public.

Received opinion has it that Facebook might as well go public once it exceeds 500 shareholders and starts making public large amounts of information about itself in 2012. And today’s news only serves to underline how difficult it is for a highly-visible company, and its advisers, to maintain a market in its securities while remaining private.

Selling the shares privately isn’t going to be a problem, reports the WSJ:

A total of about $7 billion in orders for Facebook shares has poured in, according to a person familiar with the matter. That means it is highly likely that Goldman still can pull off the offering at its original size without U.S. investors. Chinese demand is especially strong, said one person familiar with the offering.

“They’re still committed to doing the deal at the original size,” one Goldman client said.

But Facebook is a US company, and while it can surely raise lots of money from Russian and Chinese investors, that’s always going to look like a stopgap solution. This news definitely increases the chances of a Facebook IPO in 2012, while at the same time decreasing the probability that Goldman will lead it:

The struggles of the offering may also deal a blow to Goldman’s relationship to Facebook and the firm’s prospects of leading the social network’s long-awaited initial public offering, expected in 2012…

However, in the past two weeks, the relationship between Facebook and Goldman has grown increasingly tense, people involved in the offering said. Accusations about the news leak have flown back and forth, these people said.

The fact is that although remaining private is very attractive in theory, in practice it’s likely to come with a lot of unwanted attention from the SEC, and its own set of downsides. Still, an IPO is far from a foregone conclusion.

If Goldman Sachs feels left out of the running when it comes to the Facebook IPO, it’s going to be even less likely to be a model shareholder when it comes to its own $450 million stake in the company. Here’s TED, making an important point:

Do you realize how difficult it is for investment banks to put their own capital at risk to earn an underwriting or placement mandate? We hate, hate, hate it, Mr. Mallaby. It goes contrary to everything we aspire to do. Goldman only did it because it thought it could make great fees on Facebook’s eventual IPO.

And here’s Peter Gallagher, who notes that Goldman’s boilerplate talks about how the bank “may at any time further reduce its exposure to its investment in Facebook through hedging arrangements”.

Goldman could write options against its own Facebook shares and likely has discretion to do so against the fund’s holdings.

In other words, Facebook has a speculative shareholder for the first time, now that it’s made its decision to get into bed with Goldman. And Goldman will think nothing of buying puts or selling calls on Facebook shares — or even dumping its shares outright, if it’s allowed to do so — if that’s what it needs to do to protect its $450 million investment.

As the same time, however, one of the main unwritten rules of IPOs of young companies is that they always need to be priced at a level above their last funding round. If Facebook can’t IPO at a valuation significantly north of $50 billion, then it probably won’t come to market at all. (That probably explains why bidders on SecondMarket are happy to buy at a $70 billion valuation: they’re betting that when Facebook goes public, it’ll be worth more than that.)

A lot of stuff can happen to Facebook between now and a 2012 IPO. And if Goldman is shorting Facebook rather than massaging its valuation and orchestrating an IPO which values the company at $70 billion or more, then maybe Facebook won’t go public at all next year. Maybe, indeed, Facebook will learn from this whole episode that dealing with investment banks is an unpleasant and expensive exercise, and will try to avoid doing so in future as much as it possibly can.


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There’s yet another aspect to this. At the heart of Goldman’s statement reads:

“Goldman Sachs concluded that the level of media attention might not be consistent with the proper completion of a U.S. private placement under U.S. law.”

Count on Lloyd’s minions swarming media with moaning and groaning over how US law inhibits commerce, then using the media pressure to coerce US lawmakers into tweaking the rules to comply with GS’s agenda.

This deal was wrapped rather loosely to begin with, so it’s hard to imagine GS wouldn’t predict it would implode, and have a plan in place – that is, if the crazy valuation wasn’t the point of the whole thing, the “flash grenade” that would get everyone’s attention, and set the stage to legalize what is currently not.

Posted by EricVincent | Report as abusive

And so the conspiracy nuts go one step further down the rabbit hole…

Posted by CDN_finance | Report as abusive

Not to worry, GS will help you set up a small, anonymous company overseas through which wealthy GS clients can launder funds for a “foreign” investment in Facebook. Moreover, the company will be in a privacy-focused, tax-sheltered location like Aruba or Panama.

And GS will take your money coming and going. First, to set up the transaction. Then, as the Facebook investment unfolds.

Posted by Lilguy | Report as abusive

CDN_finance, Canada would have it’s own squids if we had not a few more regulations and far fewer people who were unethical and willing to create a housing boom out of thin air. We may have fewer subprime mortgages but we do have them.

Cute how Finance Minister Flaherty is trying to look a hero by reining in the very loan rules he made which could have mired Canada as well. (and we still aren’t out of the woods)

There are a lot of theories out there… and some are hilarious, but some are true. Goldman may not have conspired to take down the economy, but they surely had a tentacle in it and were/are reaping rewards for it… so people are angry and rightly so. It breeds contempt and it is deserved.

For instance, my theory is that the SEC, during their talks with Goldman over the deal, discussed only the advertising of the deal, not the ethics behind skirting the law to make it look like one entity and so Goldman is still floating that boat with the clients they know have access to offshore funds as tax havens(wonder how many do *cough*) to test the waters.

But really with 2 American companies, it still must apply. And Facebook will have to come clean and open their books after this offering whether they go public or not… “within one hundred and twenty days after the last day of its…fiscal year.”

The other part of the law that may not have been apparent to Facebook… “Notwithstanding paragraph (a) of this section…If the issuer [Facebook] knows or has reason to know that the form of holding securities of record is used primarily to circumvent the provisions of Section 12(g) or 15(d) of the Act, the beneficial owners of such securities shall be deemed to be the record owners thereof.” Just having created a vehicle that gets around the first part of the law rightfully makes one suspicious they were/are trying to circumvent it. -1b3-or-how-facebook-just-announced-plan s-to-go-public-2011-1

People are still suffering while Goldman is raking in the bucks and offering huge bonuses, so it will have to deal with bad publicity until trust is restored. It should only take 10 or so years… and some of us will be proven to not be as nutty as you might think as the truth is revealed.

Posted by hsvkitty | Report as abusive

@CDN_finance: It wasn’t even my idea. The original NYT piece on the deal’s unraveling mentioned how GS would use the occasion to beat up on US regulation.

Posted by EricVincent | Report as abusive

Facebook loses face. It’s all about the money anyway, so who cares about the people. acebook-dating/

Posted by hsvkitty | Report as abusive

Facebook loses face. It’s all about the money anyway, so who cares about the people. acebook-dating/

Posted by hsvkitty | Report as abusive