Facebook, Rich Investors And SEC Scrutiny

In light of Goldman Sachs’ recent $450 million investment in Facebook, the Securities and Exchange Commission is looking into whether it should revise its rules about disclosure and investing in private companies, the Wall Street Journal reports today.

At issue: the special purpose vehicle that Goldman Sachs is creating for its clients to buy shares of Facebook could be construed as a way for Facebook to get around the SEC rule that private companies must have fewer than 500 shareholders –or they need to disclose certain financial information. I discussed this issue in December with several specialized brokers that sell shares of Facebook to accredited investors and wrote about it here. Keith Bishop, a lawyer with Allen & Matkins and former commissioner of corporations for the state of California told me then that “If (Facebook) is pursuing this structure, then I think this is a problem.” (The WSJ also quoted Bishop in its article today.) Facebook declined to comment but a source close to Facebook said the company had fewer than 500 shareholders.

Billionaire software entrepreneur Marc Benioff, the founder and CEO of Salesforce.com, was quoted by the WSJ as saying on Facebook, “There are now thousands of investors in Facebook and more coming with these new investment vehicles. It’s already a public company. It’s just unregulated.”

I agree with Benioff.  But so far, none of the investors are complaining about the unregulated status. They’re in it for the money to be made. With the Goldman Sachs special purpose vehicle, however, I think the case is stronger that Facebook is somehow behind –or supportive of– the selling of its shares to more than 500 investors. Its lawyers had to be aware of the plan for the vehicle when the deal was struck for Goldman to invest.

The question remains: Can Facebook convince the SEC that the Goldman special purpose vehicle really is an arm’s length transaction, and not a way for the company to circumvent the 500 shareholder rule?

By KERRY A. DOLAN (Forbes)

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