Will Facebook need to tell the world about its finances after the Goldman Sachs investment?
Facebook has raised $500 million from Goldman Sachs and a Russian investor at a $50 billion valuation. The investment raises the question of whether Facebook will have to file public disclosures with the Securities and Exchange Commission (SEC) under the 500 shareholder rule. Managing the number of shareholders is an important corporate governance issue for startups that want to delay having to make SEC filings.
Does the Goldman Sachs investment in Facebook trigger the 500 shareholder rule?
The 500 shareholder rule comes into play here because Goldman Sachs is establishing a special purpose vehicle for a second investment. The New York Times explains how the special purpose vehicle might implicate the 500 shareholder rule:
As part of the deal, Goldman is expected to raise as much as $1.5 billion from investors for Facebook at the $50 billion valuation, people involved in the discussions said, speaking on the condition of anonymity because the transaction was not supposed to be made public until the fund-raising had been completed.
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.
It is unclear whether the S.E.C. will look favorably upon the arrangement.
With regard to the special purpose vehicle, you might take the view that Goldman is acting as a broker for the investors, and not as a fund manager. In that case, Goldman would not be considered the beneficial owner. Instead, each investor in the vehicle would be considered a record owner of shares. If so, then the SEC would look behind the vehicle to reach a more accurate count.
Private companies should be aware that the political environment surrounding efforts to avoid government regulation is becoming less friendly. The SEC recently announced that it would began an inquiry into trading of private company stock, particularly Facebook and Twitter, on the secondary market. Although the reason for the inquiry is unclear, the SEC may be looking into whether companies are using secondary market transactions to skirt the 500 shareholder rule and its public disclosure requirements. If the SEC reaches that conclusion, it may also scrutinize special purpose vehicles more carefully to determine whether they are being used to avoid making financial information publicly available.
Will Facebook have to file for an IPO if it has to begin making SEC disclosures?
The Goldman investment may help Facebook execute its strategy to delay an IPO even further. CEO Mark Zuckerberg has on numerous occasions declared his desire to keep Facebook private until at least 2012. In 2008, Facebook received an SEC exemption from the 500 shareholder rule. It is unclear whether the SEC would grant the company a second no action letter. If not, it would need to make public disclosures with the SEC concerning its finances, operations, and competition.
However, it is important to distinguish between making public disclosures and doing an IPO. The two are not the same. Even if Facebook were compelled to make SEC filings, it could avoid doing an IPO because investors have been willing to give it money at high valuations without blinking. Some believe that the Goldman money assures a Facebook IPO, though the timing of a public offering is uncertain.
Do you think Facebook will have to start making SEC filings?
Douglas Y. Park
Twitter: @DougYPark
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