Chris Cummins
Staff Writer
1/5/2011
Goldman Sachs, the veritable investment bank that saw its reputation tarnished in the financial panic of 2008, has reportedly informed some of it’s wealthy, private investors of an opportunity to invest in Facebook, the mammoth social networking site.
The deal, which values Facebook at around $56 billion dollars, is drawing the ire of investors and regulators, mainly because it circumvents the rules regarding privately held companies. One of the most sacrosanct rules governing privately held companies is the cap on the number of investors at 500, after which any stock issued to new stockholders automatically makes the previously private company now public.
The reason the deal is regarded as unethical is because Goldman is counting itself as one investor, allowing the firm’s most established clients to invest in Facebook while the company is still private, and benefit from the resulting surge in stock price when Mark Zuckerberg’s creation becomes publicly traded.
Putting it in Facebook speak, Goldman Sachs has the power to allow its friends the chance to see Facebook’s profile. The difference here is that access grants the user more than social esteem.
Goldman Sachs has a long and esteemed history of cultivating the money of the wealthy and becoming friends with the world’s top companies, and the recent financial troubles sweeping the Street, while damaging, seem to have affected it’s bottom line little, nor its ability to make friends; in 2009, the company reported it’s most profitable year since it’s inception, and a year later, the Facebook deal was announced.
Regarded as “too big to fail”, the investment bank was bailed out amidst the torrent of federal money seeking to stabilize the economy, due mainly to the company’s poor investment in AIG, the once mighty insurance behemoth. Goldman Sachs was then regarded as something of a humbled giant, still profitable, to be sure, but not as robust as the Goldman of the ‘90s, which routinely posted massive profits year after year, underwriting risk wherever it could be found, and reaping the returns.
After the crash, the company recovered with surprising speed, posting unexpected numbers in its reports, and then came back with this, the news that Facebook, while retaining its private company status, was able to entice investors, specifically wealthy investors, using a special purpose vehicle of Goldman’s devising in order to circumvent the rules.
At once, the deal was regarded as suspect, with the SEC launching an investigation into the legality of the transaction, and the non-investing world, from irate users venting their displeasure on Facebook, to comedians like Jon Stewart and Bill Maar, soon chimed in to express their displeasure. As of now, the deal is undergoing, and has raised over $500 million for Facebook, just in the few days since it’s been released.
Privately designated stocks are usually designated as such becomes the founders value privacy, are selective in choosing their investors, or value their autonomy. Zuckerberg’s reason for the secrecy? A man who once argued that privacy is no longer a social norm, and that completely public information is the way of the future, has listed as his reason for the secrecy of the deal a need for privacy.
Besides the irony of the situation, the deal is widely seen to have started a disturbing trend on Wall Street, namely, creating special purpose vehicles to evade the regulatory arm of the SEC. Whatever the result of this unorthodox method of fund raising, it seems Facebook has found another loophole in an already porous and precarious financial situation that looks to be widely copied by other enterprising companies.
