This week the world discovered that Goldman Sachs and Russian investor Digital Sky Technologies are planning to invest $500 million in Facebook, a deal which values the company at $50 billion.
As a part of the deal, Goldman also plans to raise $1.5 billion by peddling $2 million stakes in Facebook among its most wealthy clients. With all the recent Chinese internet IPOs
(DangDang, Youku) it’s no surprise that major US players want to get bullish on untapped American internet companies (Facebook, Twitter, Groupon, LivingSocial). There’s an angle. In order to circumvent the financial disclosure requirements set by the SEC that would force Facebook to go public, Goldman has come up with a ‘special purpose vehicle’ according to Business Insider
The best thing about the vehicle: It will bypass SEC requirements that firms with over 499 investors have to disclose their financial results to the public, since the vehicle will be managed by Goldman, which, despite pooling the funds of thousands of investors, is deemed to be a single investor.
Bravo, Mark Zuckerberg and Goldman Sachs. Zuckerberg has raised a serious amount of capital through a backroom deal, effectively bypassing the scrutiny of an initial public offering and listing on the New York Stock Exchange. This is what we call a loophole. What does this loophole mean for the future? Well for one, we can almost be certain that the SEC will continue to overcomplicate the process of companies going public. More laws, more regulation.
The reality is, it has been increasingly difficult for companies to go public with all the reporting requirements, specifically in the case of small companies. These requirements are supposed to prevent companies from committing fraud- which is valid. What these requirements have done, however, is force companies like Facebook to make deals with firms like Goldman Sachs in these ‘private IPOs’ that put the average American investor at a disadvantage. The Average Joe Investor is being boxed out by a small number of wealthy, high-net-worth individuals.
There is no doubt that the Facebook IPO is imminent. But according to some sources
, Zuckerberg is not ready to give up control.
David Kirkpatrick, author of The Facebook Effect, said: "Mark would absolutely prefer not to have an IPO until he absolutely has to.”
Wall Street is boxing out Main Street, again. But this time the SEC is to blame. If we want to stimulate the economy let’s streamline the process for small companies to go public to prevent situations like this from brewing in the future. Private IPOs are a product of our regulatory environment. It’s clear that we must change this process now to allow small companies to grow organically. American small business owners and their potential investors need to join hands once again – that’s how we really stimulate growth.