Have you received your invitation to invest in Facebook, the not-yet-listed social-networking phenom that has burst onto Wall Street with the excitement of a dot.com company a dozen years ago?
I haven’t got mine, either. They must be in the mail.
Goldman Sachs, on the other hand, has just cut a deal to buy up to $2 billion worth of Facebook stock. Some of this is for Goldman’s book, but three-quarters of it will get sold to Goldman partners (fair) and a select group of the firm’s friends (not so fair). The details of this transaction have not been made public because Goldman has set up a special purpose vehicle, portraying itself as a single investor protected by a privacy protection firewall.
So much for transparency and the new 39-step self-improvement program Goldman Sachs announced today to enhance their public image and show good faith with financial regulators. Goldman's Gerald Corrigan told The Financial Times, “There is a strong consensus by the board that the senior management team did a pretty good job of managing through the [financial] crisis,” Mr. Corrigan said. “The more important thing is that it was Lloyd [Blankfein]... who took the initiative to proceed with this aggressive process of self improvement.”
The company’s 39 steps (no intended reference to the Hitchcock classic ) apparently did not answer these conundrums: When is a public offering not a public offering—and so not subject to the Securities & Exchange Commission’s disclosure rules? When is a mutual fund—which Goldman is effectively creating with its Facebook investment—not a mutual fund? When is a market—which Goldman will make once the in-crowd investors start trading among themselves—not a market?
it ever became public. If it weren’t for the marquee names,
it’s doubtful they’d have let it go.”
Answer: When the investment bank is Goldman and the issuing company is a hot item such as Facebook. “The line between a public offering and the Goldman structure seems thin,” says Amar Bhidé, a finance professor at Tufts and the author of A Call for Judgment: Sensible Finance for a Dynamic Economy. “The SEC could have put a stop to this before it ever became public. And if it weren’t for the marquee names, it’s doubtful they’d have let it go.”
The SEC is taking a chance if it does let this deal go through, as Bhidé and other students of the market anticipate. Given the rewards, it could well become the template for other social network transactions—and, not unthinkably, the making of another tech bubble. The essence of it is the price: The bargain Goldman’s investors are getting will be obvious as the frisson of fascination surrounding Facebook builds.
When the IPO comes—and most observers expect it within six months, never mind Facebook’s coy denials—the price could well be the highest the stock ever reaches. That’s how the party works: The public comes in not at the beginning, but at the beginning of the end.
are thin and rely less on their letter
than their spirit.
Let us be clear. Goldman has broken no law or breached any regulation. But SEC rules, unlike our voluminous tax code, are thin and rely less on their letter than their spirit. The SEC does require that if there are more than 499 investors, financial data must be forthcoming. Clustering of the kind Goldman has crafted goes on all the time—among hedge funds, venture-capital firms and private equity bankers. Goldman is simply the opportunist, working just within the bounds of the genre.