Innovation Blog

Goldman Sachs: Again, an End Run Around the Rules

Are the Regulators Impotent?

By Shlomo Maital

 

 

 

A report in The Economist, Jan. 6 issue, describes the following:   Facebook is not a publicly-listed company, all its shares are privately held, by (allegedly) fewer than 500 investors, so it is not required to disclose any financial information. No-one knows for sure what its revenues or profits are.  There are great competitive advantages Facebook enjoys, behind this veil of secrecy.  But there is enormous interest in Facebook shares; Growing numbers of investors want to buy them.  But Facebook CEO and founder Mark Zuckerberg do not want to do an initial public offering (IPO) of shares yet.   They want to wait until Facebook’s soaring valuation peaks, perhaps at over $100 b. Yet Zuckerberg needs money, to expand his operations. How can you square the circle, sell shares without actually selling them?

   Goldman Sachs to the rescue!  This investment bank has valued Facebook at $50 b., and has set up an investment fund,  investing $500 m. in Facebook and creating a fund that may invest another $1.5 b. Its partner in this venture is the Russian company DST.  According to The Economist, “Clients considering signing up to its proposed Facebook fund are reportedly being asked to commit at least $2m each to it and to hold on to any shares they receive until at least 2013.”

    This action clearly circumvents the intention of the regulators, that once there is wider public ownership of shares in a company, even if the shares are not publicly listed the company must begin to disclose financial information. 

    Is Facebook worth $50 b.?  No-one knows.  Certainly there is great value to having over 500 m. subscribers.  But what is Facebook’s revenue model?  Can it support as high a valuation as $50 b.?   And what are Goldman Sachs’ motives?  Are they, perhaps, interested, in setting up an inside track for underwriting Facebook’s IPO, a deal that could bring them many billions of dollars in fees?

    And again, where are the regulators?  Is Goldman Sachs and its Russian partner, along with Facebook itself, making a terrific speedy end run around the regulations,  within the law but with dubious ethics?  And have we seen this movie before, in 2005-9? 

     The Economist concludes: “ Regulators have a duty to protect investors and weigh the concerns of companies that wish to remain private. It is a delicate balancing act. But anyone who invests in a market this frothy must surely realize it is also risky. Meanwhile, Goldman and the other banks which hope to turn these vehicles into a big business should consider friending some good lawyers.”

****  postscript:  Facebook, under pressure, has announced it will disclose financial results by April 2012 (probably a runup to an IPO), and the U.S. Securities and Exchange Commission has announced it will investigate Goldman Sachs’ “end run”.