Goldman Sachs Rejects U.S. Investors on Facebook Private Offering

Late last year The Wall Street Journal reported that the Securities and Exchange Commission (SEC) had preliminarily began to investigate the trading of privately held tech companies, including Facebook and Twitter. The investigation was focused on funds that obtain shares of privately held companies from a seller, like an employee of the company, and then find investors willing to buy those shares plus transaction fees. It is also believed that the investigation is examining how these funds and the potential expansion of ownership in privately held companies will affect those companies and their need to disclose certain financial information. Therefore, if a company has more than 500 shareholders and over $10 million in assets, under U.S. securities laws, they must make the appropriate disclosures.

Goldman Sachs had planned to sell up to $1.5 billion in Facebook, Inc. to clients willing to make a minimum investment of $2 million, with the provisions that such shares be held until 2013. Although the offering was to be limited, details of the deal were leaked to the media and the deal quickly became publicized, leaving Goldman with $7 billion in orders for $1.5 billon of Facebook shares. The heightened public awareness of the offering caused Goldman Sachs to conclude that “the level of media attention might not be consistent with the proper completion of a U.S. private placement under U.S. law." Therefore on January 17, 2011, Goldman Sachs announced that it would not be including U.S. investors in its private offering of Facebook. It should be noted that Goldman Sachs’ decision was their own, and was not “required or requested by any other party,” such as the SEC.

It appears that Regulation D of the Securities Act of 1933 and its corresponding rules banning a general solicitation, including any advertisements, articles in newspapers, magazines, and similar media (ex the internet), is at issue in this situation. It also appears that the rules governing the offer outside the U.S. are less strict concerning this type of offering, and is why non-U.S. investors are still able to participate in the offering.

The question raised is whether such regulations benefits U.S. investors. Critics argue that such restrictions are burdensome and place U.S. investors at a disadvantage when compared to their foreign counterparts. Supporters of the regulations noted that “[t]he notion of a private offering of a company that has been widely touted is inconsistent with our federal securities laws.” Further, it is argued that investors should think twice before taking part in such a private offering, as they do so without access to the financial disclosures required for publicly traded corporations, and therefore may not be able to make a fully informed decision regarding the potential investment. Others praised Goldman Sachs’ decision, noting that being cautious regarding rules and regulations was a step in the right direction for the firm, especially after last year’s suit by the SEC which ended in a $500 million settlement.

There are certainly differing views as to what role the government should play in the regulation of the markets. U.S. investors deprived of the opportunity to purchase Facebook shares are likely to be highly sophisticated and wealthy (at least able to afford the minimum $2 million investment) and as such may not need the same protections as consumers on the public markets. However, in being cautious and proactively ensuring compliance with U.S. securities laws, as opposed to being sued by the SEC for non-compliance, Goldman Sachs did the right thing. Actively and publically letting the American people know that they are following the rules may improve the public’s perception of Goldman Sachs and the banking industry as a whole. Although U.S. investors may feel left out, there may be other ways for them to presently acquire Facebook shares, or they may wait until Facebook goes public, which may happen in April of 2012.