There’s a fascinating discussion developing around the question of what the Goldman Sachs $450 or $500 million investment means for a future Facebook IPO. Does it mean it’s around the corner? Alternatively does it do the opposite and delay an IPO a year or more?
At the center of the debate is an obscure SEC rule that requires companies with 500 or more shareholders to start disclosing financial information even if they haven’t gone public. Presumably the rule is intended to create more transparency for shareholders so that they’re not deceived or manipulated by company executives.
The New York Times has a lengthy discussion of the SEC provision in question:
Specifically, Section 12(g) requires that a company register its securities with the S.E.C. if it “has total assets exceeding $1,000,000 and a class of equity security … held of record by five hundred or more … persons…”
The S.E.C. by rule-making has raised the $1 million threshold to $10 million. But either way, Facebook certainly exceeds this asset threshold.
The issue comes with the 500-person requirement. This speaks only of shareholder-of-record ownership. Shares can be held “of record” or “beneficially,” but the rule is only set off based on the number of shareholders who hold shares “of record.”
Goldman is now offering its wealthiest clients the option to buy into a “special purpose vehicle” (fund) that will be a single owner of record, thereby just adding one more shareholder to Facebook’s books.
According to reports, Goldman clients will need to invest a minimum of $2 million to gain access to the Facebook fund. Let’s assume that Goldman’s investment in Facebook is $450 million and that each Goldman client participating invested the minimum of $2 million. That would mean 225 new Facebook investors. However they’re only indirect shareholders and wouldn’t count as owners of record, thereby avoiding triggering the rule.
David Kirkpatrick, who wrote a book about the social network, explains that Facebook CEO Mark Zuckerberg seeks to delay an IPO as long as legally and humanly possible — and that the Goldman investment was a way to get more capital and achieve that delay. Kirkpatrick argues that Zuckerberg worries about losing control of the company, its culture changing and otherwise being exposed to competitors, regulators and potentially hostile or inquisitive others:
Zuckerberg has had an amazing run so far of soaring growth while facing surprisingly few major obstacles. That won’t remain the case as the company’s scale and global footprint attract more and more attention from competitors, governments, regulators, and advocates for Internet privacy, security, and openness. Money, which Facebook keeps finding ways to acquire without treading the rocky path of a public offering, can make all the difference.
A Facebook IPO is inevitable. Will it be 2012 or 2013? I’m not sure.
Zuckerberg may also feel, perhaps correctly, that he’s not a public company CEO in the way that Sergey Brin and Larry Page are equally not. That may be another consideration. Sheryl Sandberg, now COO, is probably a better candidate for public-company CEO than the more idiosyncratic though likable Zuckerberg.
It’s also true that Facebook’s culture will change to some degree when many key employees become super wealthy. But Google managed to pass through its IPO initiation, continue to grow and succeed spectacularly as a public company.
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