Facebook’s Goldman deal points to a flawed IPO / SEC policy.

 

As part of the deal, Goldman will reportedly invest $450 million in Facebook and Digital Sky Technologies, a Russian investment firm which already has a substantial stake in the social network platform, will invest another $50 million, but that is only stage one. In stage two, according to Dealbook, “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.” The story goes on: “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.”

[From Rational Irrationality: Facebook-Goldman: Where Is the S.E.C.? : The New Yorker]

 

I love this loophole. I hope Goldman has success with it (even though I hate Goldman).

The biggest issue here is that the rules around IPOs are prohibitive. Sarbanes-Oxley and the rules regarding IPO are amazingly complex and clearly larger companies want to avoid them if at all possible.

Even if you agree that Sarbanes-Oxley and these rules need to stay in place, the fact that they can be so easily avoided really makes the SEC look bad.

I’m all in favor of criminalizing corruption but if the rules can be easily bypassed what’s the point?

Update:

Business Insider has more on this specifically regarding the risk and ability for smaller companies to IPO:

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?

I’m a fan of small companies. Large companies crush innovation and remove individual liberty since they tend to prevent you and I from starting our own companies and compete (since the rules favor larger established players).

If the rules are relaxed, smaller companies can IPO sooner to get access to additional capital to grow their businesses faster.


  1. As far as innovation is concerned I think it will definitely be killed when such a large number of shareholders start to interfere in the business decisions made by the owners of Facebook.