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Facebook-Goldman: Where Is the S.E.C.?

130 points by jsm386 16y ago

tptacek 16y ago
This particular SEC reg is designed to protect the investors, not the integrity of the market. Are we now expected to believe that Goldman --- or any private client of Goldman --- is getting snookered by Facebook? The same logic used by the SEC suggests that every limited partner of every VC that invests in any startup should also count to the total number of investors.
- Umalu 16y ago
  Although the SEC considers itself the "investor's advocate," it usually steps back and allows "accredited investors" and "qualified purchasers" (terms it uses for "rich investors") to invest on their own. So if Goldman Sachs and its clients are truly rich and sophisticated, I don't think the SEC will view protecting them as a good use of its time. That being said, Goldman Sachs and its investors will likely insist on financial disclosures from Facebook and maybe even some governance rights that, while not quite public company-strength, will lead to Facebook disclosing more information to more people than it had previously.
  - tptacek 16y ago
    Goldman can't sell shares of a Facebook investment vehicle to non-accredited investors.
- JoelSutherland 16y ago
  Yes, Goldman's private clients are getting snookered. This is exactly how Goldman managed to be so successful in the subprime crisis. When they decided to unload their holdings, they were sold to their clients. There is a strong conflict of interest at Goldman between shareholders and clients. My understanding is that Goldman can do two things to make money here: 1. charge fees on transactions and 2. decide when and how to sell/buy shares for themselves. Whether the clients should be protected by the SEC is another matter.
  - tptacek 16y ago
    You're missing my point. The SEC protects non-accredited investors by forbidding companies from selling them shares. Goldman doesn't trade for non-accredited investors. If you are a Goldman private client, you are by definition outside the purview of those protections. Starting a big long thread about how Goldman is a vampire squid or whatever Taibbi called them is a waste of time, because I'm not arguing that Goldman is a good company or a bad company or that its interests are aligned with its clients. I'm saying that the logic that assails Goldman's Facebook vehicle is nonsensical; Goldman is doing nothing more sinister than creating an ad-hoc venture capital fund and using it to invest in Facebook. Does every California public employee also count as a Facebook shareholder if CalPERS is an LP of a VC that invests in Facebook? (Answer: no.)
    - timr 16y ago
      "Goldman is doing nothing more sinister than creating an ad-hoc venture capital fund and using it to invest in Facebook. Does every California public employee also count as a Facebook shareholder if CalPERS is an LP of a VC that invests in Facebook?" A venture capital fund is diversified over many investments -- that's why it's a fund. A venture capital "fund" that invests only in Facebook is a fund in name only. Also, unless you're a lawyer specializing in securities law, I doubt you know the answer to your own question. State employees can (and do) initiate lawsuits against CALPERS, and CALPERS has sued public companies on behalf of state employees. The pensioners clearly have some rights as investors.
      - tptacek 16y ago
        By your logic, CalPERS can't invest in any fund that invests in private companies, as that investment would instantaneously tip the company over the "500 investor" limit. Meanwhile, what does diversification have to do with the structure of a venture capital fund?
        timr 16y ago
        "By your logic, CalPERS can't invest in any fund that invests in private companies, as that investment would instantaneously tip the company over the "500 investor" limit." No, that's not what I said. I said that the investors clearly have rights -- presumably including the right to know the financial prospects for their investments. CalPERS invests some money in private equity funds and limited partnerships, but that just begs the original question. I don't know what the disclosure requirements are for companies involved in that kind of investment, but then, I'm not a securities law expert. Do you actually know the answer, or are you just asking rhetorical questions in the hope that people will interpret your questions as statements of fact? "Meanwhile, what does diversification have to do with the structure of a venture capital fund?" Risk.
myth_drannon 16y ago
Interesting take from ZeroHedge : http://www.zerohedge.com/article/goldman-creates-facebook-hedge-fund-hnw-clients-historically-ripped-such-vehicles-spits-face http://www.zerohedge.com/article/goldman-creates-facebook-he...
- trotsky 16y ago
  The only thing that's really left for one of these private share vehicles to do is pull a reverse shell merger with an OTC listed firm and let joe retail investor start day trading the result. Now that's the bubble I remember.
ramanujan 16y ago
This is a fantastic, precedent setting move and a response to the political sector's irrational laws (see: Sarbanes-Oxley). It was presaged by the DST style investments over the last few years, and we can only hope that more companies follow suit. If you want to reduce speculation and uninformed trading, at least one way to do that is to give companies rights over who trades their shares and under what circumstances. You're not forced to sell your house to anyone, so why should you be forced to sell your company to anyone -- particularly day traders who will just introduce volatility and aren't in it for the long haul? A long overdue organic reaction to the silly laws passed in the wake of the last financial crisis. No doubt we will see similar workarounds for the work of art that was "FinReg", though those workarounds may take the form of debuting on the Hong Kong Stock Exchange rather than the NYSE. It's a little known fact, but Google also made use of certain legal workarounds to avoid going public for as long as possible (among other things, they split the company into two units of 499 people apiece, or so I recall).
- alexwestholm 16y ago
  While I get your point about volatility, I'm not so sure I agree with the idea that large companies ought to have absolute control over who owns their shares. That's fundamentally contrary to the idea of open markets, and sets up too much potential for abuse. It's not hard to envision a marketplace where pervasive use of this technique concentrates wealth even further than it already is.
  - ramanujan 16y ago
    > It's not hard to envision a marketplace where pervasive use of this technique concentrates wealth even further than it already is. Don't see how that follows. If you are restricting the market to only a fixed number of sellers, you are leaving a potentially significant amount of money on the table. You're doing that to prevent the abuse of your company's shares by investors, who generally have more money than you do. Imagine if you didn't have the right to turn down a VC who only wanted to put in money once you got hot, and then came to your board meetings as a shareholder and caused problems. Or to be criminally responsible if an accountant somewhere in your organization makes an error. That's what it is to be a public company in the post-Sarbox/Finreg US. This is about protecting the entrepreneur, not about protecting the old money.
ankimal 16y ago
Just to clarify (its in the comments) too but as the law stands, FB does not have to go public anyway but only disclose financial results. http://www.sec.gov/about/laws.shtml http://www.sec.gov/about/laws.shtml (Corporate Reporting)
deleted 16y ago
[deleted]
cynicalkane 16y ago
Back when Berkshire Hathaway only had Class-A shares worth thousands of dollars, there were a few investment firms at work on similar vehicles to allow ordinary investors to buy fractions of a share at smaller prices. Berkshire responded by issuing their own fractions, at 1/30th of a Class-A share (since split to 1/1500th), because they wanted investors, not investment firms, owning the shares. It's interesting that now Facebook is doing a sort of converse of Berkshire's actions; that the pain of a public company is so onerous that having a bank involved is apparently seen as an advantage.
- nostromo 16y ago
  Alternatively, FB may just want to keep financials a secret because they are worth a lot more when people are wildly speculating than they would be if they had to be as open as a public company. (Goldman probably got a look under the hood, but I doubt they will pass that along to the investors they hope to sell Facebook investments to, so both FB and Goldman will benefit from uninformed speculation.)
  - rhizome 16y ago
    ...at least until they can ride those numbers into an IPO.
  - vessenes 16y ago
    Any prospectus put together by Goldman will have significant disclosure and results of their internal audits. Despite the hoopla, this is a pretty regulated area of commerce. As to who will read such a prospectus, that's likely a different beast altogether. It's my belief that FB is more likely to be in a pre-IPO Google situation right now, that is, that they're sitting on more than people realize, not less. I recall Google routinely requiring academics to cut the server and request numbers by a factor of 10-100x when giving talks about what was going on, pre-IPO. A luxury I'm sure they would appreciate still having.
- joe_the_user 16y ago
  that the pain of a public company is so onerous that having a bank involved is apparently seen as an advantage Let's be specific about this "pain". What I recall from various articles, Facebook is very reticent to have it's actual revenue numbers floating around. One might argue that there is too much regulation of public companies in general but the specific regulation that a public company has to engage in public disclosure seems sound to me. Facebook's skirting of this regulation seems questionable to say the least.
powera 16y ago
I still don't get why anybody would invest in a company at $50 billion with no knowledge of how much money they are making.
- sploink 16y ago
  You can bet that Goldman would have got hold of Facebook's financial statements from it before making that investment. You don't invest a few hundred million dollars before kicking the tires first.
  - powera 16y ago
    Sure, Goldman has it, but the sub-investors in their fund probably just get a "Very Good Valuation" assessment.
    - sploink 16y ago
      That's a valid point, but there is some validation investors get from Goldman and DST investing at that valuation. I think that DST is investing as principal, so it says something that they think it is worthwhile at that valuation (and DST is not a first time investor so they are familiar with FB's financials).
    - Travis 16y ago
      But isn't it the responsibility of the sub-investors to do their own due diligence? After all, the entire purpose of accrediting investors is to get them to acknowledge that they are being given less protection from the SEC. It's a process where the SEC asks the investor, "OK, you have a million dollars. Are you sure you know what you're doing?" And the individual says, "Yes, I'm willing to accept the additional risk that comes along with less oversight (ie. more flexibility)". If an investor is putting money into the pot based on just the "Very Good Valuation" argument, and they've acknowledged the risks, they are not eligible for certain protections (because those protections also limit certain financial vehicles). In a similar vein, I feel no sympathy for the majority of the people who gave their money to Bernie Madoff. I do, however, believe that there should be legal consequences for money managers who make those types of investments without proper due diligence.
javanix 16y ago
I really can't imagine that this is the first time this particular move was tried. Google had been a dominant search engine for years before they went public, and I can't imagine they turned down many $50 billion funding rounds simply to avoid turning public before their IPO.
- Symmetry 16y ago
  The law was different back when Google was having its IPO.
  - javanix 16y ago
    From http://dealbook.nytimes.com/2011/01/03/facebook-and-the-500-person-threshold/ http://dealbook.nytimes.com/2011/01/03/facebook-and-the-500-...: The Securities Exchange Act of 1934 sets forth certain requirements for companies to register their shares with the S.E.C. 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…” Sounds to me like this law has been around for a while.
    - tokenadult 16y ago
      That statement might mean, "The Securities Exchange Act of 1934 as amended," because laws are often named by their original date of enactment, but amended subsequently.
    - Symmetry 16y ago
      That law has but Sarbanes-Oxely, which has caused Facebook to avoid an IPO and Google not to, was much more recent.
d2viant 16y ago
I think people are missing an angle in this story. I don't think the interesting part is the $450 million they invested or the vehicle they're setting up for investors. It's Facebook's future IPO and Goldman likely just bought themselves the primary role in issuing that IPO -- of which they stand to make billions off of.
- nir 16y ago
  That's right. If they can hype Facebook enough, Goldman will cover their investment easily. It's less about what Facebook turns out to be actually worth in the long term than what GS can help make people believe it's worth in the near term.
Nate75Sanders 16y ago
"All problems in computer science can be solved by another level of indirection" Looks like it works in finance, too. And a whole lot of other disciplines.
- kenjackson 16y ago
  But there's always one nagging problem which it doesn't. In CS it is performance. In finance, maybe solvency?
  - smokinn 16y ago
    In finance it's returns (ironically, also often referred to as performance). Each level of indirection means a middleman somewhere is taking a cut.
    - jrockway 16y ago
      Indeed. Investment banks do not make money with some magic computer program that buys low and sells high eight billion times per second. They make money by buying something, "adding value", calling up clients and asking them to buy it, and then taking a cut when they do. In some cases, this has changed the way the world works; consider options. (In general, it's really not as evil as it sounds. I write software to help price interest rate swaps, and those don't really ring any ethical alarm bells: http://en.wikipedia.org/wiki/Interest_rate_swap http://en.wikipedia.org/wiki/Interest_rate_swap I don't think the Goldman/Facebook thing is particularly evil, either. The government says that normal people can't buy Facebook shares, but normal people want to. Goldman invented a solution to the problem, and will profit from doing so. "Adding value" like this is great when it's a way to sell ads to web 2.0 users, but not when it's a bank? Why?)
boredguy8 16y ago
Anyone else remember when people were freaking at the $15b valuation of FB? Now it's not the valuation but rather the method of the investment.
- Charuru 16y ago
  Facebook has proven itself since them. When TV stations start promoting their facebook pages rather than their own websites you know they're onto something.
  - mishmash 16y ago
    But they also did that with MySpace and look how that is turning out.
    - meric 16y ago
      Second Life too.
fleitz 16y ago
The SEC is where they always are, fighting the last war. Investments create return because there is risk, not every investment is going to be a winner. When investing in startups with new business models there is a lot of risk and hence a lot of return. Hopefully the SEC stays out of it because the combination of the SEC, Federal Reserve and Federal Gov't create untold havok in the market. Even a GIC has risk because of the underlying fractional reserve system. The same thing that allows the economy to expand faster than the rate of gold mining also allows the leverage to unwind just as fast. The Fed, SEC, and Federal Gov't collude to prevent the free market from working and bad ideas from failing. Look at a graph of global IPOs vs. IPOs on american exchanges since Sarbox was passed. You'll see how the overly onerous regulations prevent the market from functioning properly and create an environment of moral hazard where undue risks are taken, and investors who correct the market have their returns taken away from them. The investors who shorted AIG, Bear Stearns, GS, Citigroup, BOA, etc and recognized their impending fiscal collapse should be handsomely rewarded for their prescient view of the market. Having your company collapse is the right way to handle reckless investing. Hopefully the SEC stays out of it, an ETF/Shell corp for Facebook shares is the ideal balance between public money and few onerous requirements. If an investor feels that the lack information available for Facebook prevents an informed decision from being made then perhaps they should not invest. Yes, you may lose your shirt investing in Facebook, but you might also make a lot of money. I don't see a problem with either outcome.
- encoderer 16y ago
  But this hack that GS created -- bypassing the 500 shareholder limit by creating a company that owns a stake in FB and then selling shares of said company -- completely undermines the law. This is a temporary loophole that will be fixed. I don't begrudge facebook a thing. They get most the upside of an IPO with nearly none of the downside. But to act that it's perfectly alright because, hey, caveat emptor... i disagree strongly with that.
- brc 16y ago
  I don't want to disagree with your main point, but it's wrong to link risk and return so closely, as though one always brings the other. Just because there is a lot of risk doesn't mean there will be a lot of return. Risk is simply the likelihood that you will get your original money back, plus any return. The higher the risk, the higher the chance you won't get any return or indeed your original capital. While this often means that people will only take on risky investments if there is a chance of high return, the way it reads is that all you need to do is create some risk and your returns wil flow. It's entirely possible to have high risk, low return and low risk, high return. However I agree entirely that SEC always fights the last war like the French building the Maginot line, and that this type of innovation is just a response to the Sarbox rules.
patrickgzill 16y ago
I don't know if Goldman did this, but Morgan Stanley did: they sold silver bullion to their clients, then charged them an ongoing storage fee to hold the bullion on their behalf in their vault. Problem was, as it came out, that MS never actually bought the bullion and thus was charging storage fees on non-existent items. If you went to remove or claim your silver, they just gave you cash as settlement, making the scam opaque. The cynic in me says GS will do something similar, like put a very high valuation on the FB units they sell, both marking them up a great deal over what they paid FB for it AND inventing some of the units out of whole cloth (i.e. issuing 10,000 units for sale when they only bought enough FB for 1,000 units), then, over time, the FB units will be seen to "decline" in value and GS will pocket the profits twice, first on the markup of the units, then on the decline.
- fleitz 16y ago
  This process is essential to what the banking industry does. Banks are one of the few institutions authorized by law to do this. When you deposit money in a bank, they create 9X the loans of what you've deposited. I'd bet if you read the fine print on the MS offering it would tell you that this is exactly what they were doing. MS & GS are too smart and too big of a target to engage in outright fraud.
  - borski 16y ago
    True, Enron was tiny.
  - xenophanes 16y ago
    > When you deposit money in a bank, they create 9X the loans of what you've deposited. Source? I thought what they did is loan out 90% of what you deposited.
    - patrickgzill 16y ago
      I think the poster is talking about re-deposits and how, recycled, that can end up being a multiple of what is deposited. Example: you deposit $1000 in a bank with 10% reserve policy ($100 set aside as capital reserve of the bank). Bank loans out $900 to customer for new office furniture; then that money is used to pay the office store, which is another depositor at the bank - which then counts as another deposit, 10% of which is set aside as reserve ($90). Another loan of $810 is then made, etc.
rmrm 16y ago
a company I recently left ran up against this same 500 shareholder rule. To get back down comfortably below 500, they performed a substantial reverse split, which caused many former employees to be taken down below 1 share. Apparently at that level, the company can cash them out as you can't hold only a fraction of 1 share. Once those former employees were rounded into nothingness, they performed a forward split to restore everything to their previous levels. I thought that was a rather clever workaround.
known 16y ago
Govt fears big companies.

130 points by jsm386 16y ago

This particular SEC reg is designed to protect the investors, not the integrity of the market. Are we now expected to believe that Goldman --- or any private client of Goldman --- is getting snookered by Facebook? The same logic used by the SEC suggests that every limited partner of every VC that invests in any startup should also count to the total number of investors.

Umalu 16y ago
Although the SEC considers itself the "investor's advocate," it usually steps back and allows "accredited investors" and "qualified purchasers" (terms it uses for "rich investors") to invest on their own. So if Goldman Sachs and its clients are truly rich and sophisticated, I don't think the SEC will view protecting them as a good use of its time. That being said, Goldman Sachs and its investors will likely insist on financial disclosures from Facebook and maybe even some governance rights that, while not quite public company-strength, will lead to Facebook disclosing more information to more people than it had previously.
- tptacek 16y ago
  Goldman can't sell shares of a Facebook investment vehicle to non-accredited investors.
JoelSutherland 16y ago
Yes, Goldman's private clients are getting snookered. This is exactly how Goldman managed to be so successful in the subprime crisis. When they decided to unload their holdings, they were sold to their clients. There is a strong conflict of interest at Goldman between shareholders and clients. My understanding is that Goldman can do two things to make money here: 1. charge fees on transactions and 2. decide when and how to sell/buy shares for themselves. Whether the clients should be protected by the SEC is another matter.
- tptacek 16y ago
  You're missing my point. The SEC protects non-accredited investors by forbidding companies from selling them shares. Goldman doesn't trade for non-accredited investors. If you are a Goldman private client, you are by definition outside the purview of those protections. Starting a big long thread about how Goldman is a vampire squid or whatever Taibbi called them is a waste of time, because I'm not arguing that Goldman is a good company or a bad company or that its interests are aligned with its clients. I'm saying that the logic that assails Goldman's Facebook vehicle is nonsensical; Goldman is doing nothing more sinister than creating an ad-hoc venture capital fund and using it to invest in Facebook. Does every California public employee also count as a Facebook shareholder if CalPERS is an LP of a VC that invests in Facebook? (Answer: no.)
  - timr 16y ago
    "Goldman is doing nothing more sinister than creating an ad-hoc venture capital fund and using it to invest in Facebook. Does every California public employee also count as a Facebook shareholder if CalPERS is an LP of a VC that invests in Facebook?" A venture capital fund is diversified over many investments -- that's why it's a fund. A venture capital "fund" that invests only in Facebook is a fund in name only. Also, unless you're a lawyer specializing in securities law, I doubt you know the answer to your own question. State employees can (and do) initiate lawsuits against CALPERS, and CALPERS has sued public companies on behalf of state employees. The pensioners clearly have some rights as investors.
    - tptacek 16y ago
      By your logic, CalPERS can't invest in any fund that invests in private companies, as that investment would instantaneously tip the company over the "500 investor" limit. Meanwhile, what does diversification have to do with the structure of a venture capital fund?
      - timr 16y ago
        "By your logic, CalPERS can't invest in any fund that invests in private companies, as that investment would instantaneously tip the company over the "500 investor" limit." No, that's not what I said. I said that the investors clearly have rights -- presumably including the right to know the financial prospects for their investments. CalPERS invests some money in private equity funds and limited partnerships, but that just begs the original question. I don't know what the disclosure requirements are for companies involved in that kind of investment, but then, I'm not a securities law expert. Do you actually know the answer, or are you just asking rhetorical questions in the hope that people will interpret your questions as statements of fact? "Meanwhile, what does diversification have to do with the structure of a venture capital fund?" Risk.

myth_drannon 16y ago

Interesting take from ZeroHedge : http://www.zerohedge.com/article/goldman-creates-facebook-hedge-fund-hnw-clients-historically-ripped-such-vehicles-spits-face http://www.zerohedge.com/article/goldman-creates-facebook-he...

trotsky 16y ago
The only thing that's really left for one of these private share vehicles to do is pull a reverse shell merger with an OTC listed firm and let joe retail investor start day trading the result. Now that's the bubble I remember.

ramanujan 16y ago

This is a fantastic, precedent setting move and a response to the political sector's irrational laws (see: Sarbanes-Oxley). It was presaged by the DST style investments over the last few years, and we can only hope that more companies follow suit. If you want to reduce speculation and uninformed trading, at least one way to do that is to give companies rights over who trades their shares and under what circumstances. You're not forced to sell your house to anyone, so why should you be forced to sell your company to anyone -- particularly day traders who will just introduce volatility and aren't in it for the long haul? A long overdue organic reaction to the silly laws passed in the wake of the last financial crisis. No doubt we will see similar workarounds for the work of art that was "FinReg", though those workarounds may take the form of debuting on the Hong Kong Stock Exchange rather than the NYSE. It's a little known fact, but Google also made use of certain legal workarounds to avoid going public for as long as possible (among other things, they split the company into two units of 499 people apiece, or so I recall).

alexwestholm 16y ago
While I get your point about volatility, I'm not so sure I agree with the idea that large companies ought to have absolute control over who owns their shares. That's fundamentally contrary to the idea of open markets, and sets up too much potential for abuse. It's not hard to envision a marketplace where pervasive use of this technique concentrates wealth even further than it already is.
- ramanujan 16y ago
  > It's not hard to envision a marketplace where pervasive use of this technique concentrates wealth even further than it already is. Don't see how that follows. If you are restricting the market to only a fixed number of sellers, you are leaving a potentially significant amount of money on the table. You're doing that to prevent the abuse of your company's shares by investors, who generally have more money than you do. Imagine if you didn't have the right to turn down a VC who only wanted to put in money once you got hot, and then came to your board meetings as a shareholder and caused problems. Or to be criminally responsible if an accountant somewhere in your organization makes an error. That's what it is to be a public company in the post-Sarbox/Finreg US. This is about protecting the entrepreneur, not about protecting the old money.

ankimal 16y ago

Just to clarify (its in the comments) too but as the law stands, FB does not have to go public anyway but only disclose financial results. http://www.sec.gov/about/laws.shtml http://www.sec.gov/about/laws.shtml (Corporate Reporting)

deleted 16y ago

[deleted]

cynicalkane 16y ago

Back when Berkshire Hathaway only had Class-A shares worth thousands of dollars, there were a few investment firms at work on similar vehicles to allow ordinary investors to buy fractions of a share at smaller prices. Berkshire responded by issuing their own fractions, at 1/30th of a Class-A share (since split to 1/1500th), because they wanted investors, not investment firms, owning the shares. It's interesting that now Facebook is doing a sort of converse of Berkshire's actions; that the pain of a public company is so onerous that having a bank involved is apparently seen as an advantage.

nostromo 16y ago
Alternatively, FB may just want to keep financials a secret because they are worth a lot more when people are wildly speculating than they would be if they had to be as open as a public company. (Goldman probably got a look under the hood, but I doubt they will pass that along to the investors they hope to sell Facebook investments to, so both FB and Goldman will benefit from uninformed speculation.)
- rhizome 16y ago
  ...at least until they can ride those numbers into an IPO.
- vessenes 16y ago
  Any prospectus put together by Goldman will have significant disclosure and results of their internal audits. Despite the hoopla, this is a pretty regulated area of commerce. As to who will read such a prospectus, that's likely a different beast altogether. It's my belief that FB is more likely to be in a pre-IPO Google situation right now, that is, that they're sitting on more than people realize, not less. I recall Google routinely requiring academics to cut the server and request numbers by a factor of 10-100x when giving talks about what was going on, pre-IPO. A luxury I'm sure they would appreciate still having.
joe_the_user 16y ago
that the pain of a public company is so onerous that having a bank involved is apparently seen as an advantage Let's be specific about this "pain". What I recall from various articles, Facebook is very reticent to have it's actual revenue numbers floating around. One might argue that there is too much regulation of public companies in general but the specific regulation that a public company has to engage in public disclosure seems sound to me. Facebook's skirting of this regulation seems questionable to say the least.

powera 16y ago

I still don't get why anybody would invest in a company at $50 billion with no knowledge of how much money they are making.

sploink 16y ago
You can bet that Goldman would have got hold of Facebook's financial statements from it before making that investment. You don't invest a few hundred million dollars before kicking the tires first.
- powera 16y ago
  Sure, Goldman has it, but the sub-investors in their fund probably just get a "Very Good Valuation" assessment.
  - sploink 16y ago
    That's a valid point, but there is some validation investors get from Goldman and DST investing at that valuation. I think that DST is investing as principal, so it says something that they think it is worthwhile at that valuation (and DST is not a first time investor so they are familiar with FB's financials).
  - Travis 16y ago
    But isn't it the responsibility of the sub-investors to do their own due diligence? After all, the entire purpose of accrediting investors is to get them to acknowledge that they are being given less protection from the SEC. It's a process where the SEC asks the investor, "OK, you have a million dollars. Are you sure you know what you're doing?" And the individual says, "Yes, I'm willing to accept the additional risk that comes along with less oversight (ie. more flexibility)". If an investor is putting money into the pot based on just the "Very Good Valuation" argument, and they've acknowledged the risks, they are not eligible for certain protections (because those protections also limit certain financial vehicles). In a similar vein, I feel no sympathy for the majority of the people who gave their money to Bernie Madoff. I do, however, believe that there should be legal consequences for money managers who make those types of investments without proper due diligence.

javanix 16y ago

I really can't imagine that this is the first time this particular move was tried. Google had been a dominant search engine for years before they went public, and I can't imagine they turned down many $50 billion funding rounds simply to avoid turning public before their IPO.

Symmetry 16y ago
The law was different back when Google was having its IPO.
- javanix 16y ago
  From http://dealbook.nytimes.com/2011/01/03/facebook-and-the-500-person-threshold/ http://dealbook.nytimes.com/2011/01/03/facebook-and-the-500-...: The Securities Exchange Act of 1934 sets forth certain requirements for companies to register their shares with the S.E.C. 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…” Sounds to me like this law has been around for a while.
  - tokenadult 16y ago
    That statement might mean, "The Securities Exchange Act of 1934 as amended," because laws are often named by their original date of enactment, but amended subsequently.
  - Symmetry 16y ago
    That law has but Sarbanes-Oxely, which has caused Facebook to avoid an IPO and Google not to, was much more recent.

d2viant 16y ago

I think people are missing an angle in this story. I don't think the interesting part is the $450 million they invested or the vehicle they're setting up for investors. It's Facebook's future IPO and Goldman likely just bought themselves the primary role in issuing that IPO -- of which they stand to make billions off of.

nir 16y ago
That's right. If they can hype Facebook enough, Goldman will cover their investment easily. It's less about what Facebook turns out to be actually worth in the long term than what GS can help make people believe it's worth in the near term.

Nate75Sanders 16y ago

"All problems in computer science can be solved by another level of indirection" Looks like it works in finance, too. And a whole lot of other disciplines.

kenjackson 16y ago
But there's always one nagging problem which it doesn't. In CS it is performance. In finance, maybe solvency?
- smokinn 16y ago
  In finance it's returns (ironically, also often referred to as performance). Each level of indirection means a middleman somewhere is taking a cut.
  - jrockway 16y ago
    Indeed. Investment banks do not make money with some magic computer program that buys low and sells high eight billion times per second. They make money by buying something, "adding value", calling up clients and asking them to buy it, and then taking a cut when they do. In some cases, this has changed the way the world works; consider options. (In general, it's really not as evil as it sounds. I write software to help price interest rate swaps, and those don't really ring any ethical alarm bells: http://en.wikipedia.org/wiki/Interest_rate_swap http://en.wikipedia.org/wiki/Interest_rate_swap I don't think the Goldman/Facebook thing is particularly evil, either. The government says that normal people can't buy Facebook shares, but normal people want to. Goldman invented a solution to the problem, and will profit from doing so. "Adding value" like this is great when it's a way to sell ads to web 2.0 users, but not when it's a bank? Why?)

boredguy8 16y ago

Anyone else remember when people were freaking at the $15b valuation of FB? Now it's not the valuation but rather the method of the investment.

Charuru 16y ago
Facebook has proven itself since them. When TV stations start promoting their facebook pages rather than their own websites you know they're onto something.
- mishmash 16y ago
  But they also did that with MySpace and look how that is turning out.
  - meric 16y ago
    Second Life too.

fleitz 16y ago

The SEC is where they always are, fighting the last war. Investments create return because there is risk, not every investment is going to be a winner. When investing in startups with new business models there is a lot of risk and hence a lot of return. Hopefully the SEC stays out of it because the combination of the SEC, Federal Reserve and Federal Gov't create untold havok in the market. Even a GIC has risk because of the underlying fractional reserve system. The same thing that allows the economy to expand faster than the rate of gold mining also allows the leverage to unwind just as fast. The Fed, SEC, and Federal Gov't collude to prevent the free market from working and bad ideas from failing. Look at a graph of global IPOs vs. IPOs on american exchanges since Sarbox was passed. You'll see how the overly onerous regulations prevent the market from functioning properly and create an environment of moral hazard where undue risks are taken, and investors who correct the market have their returns taken away from them. The investors who shorted AIG, Bear Stearns, GS, Citigroup, BOA, etc and recognized their impending fiscal collapse should be handsomely rewarded for their prescient view of the market. Having your company collapse is the right way to handle reckless investing. Hopefully the SEC stays out of it, an ETF/Shell corp for Facebook shares is the ideal balance between public money and few onerous requirements. If an investor feels that the lack information available for Facebook prevents an informed decision from being made then perhaps they should not invest. Yes, you may lose your shirt investing in Facebook, but you might also make a lot of money. I don't see a problem with either outcome.

encoderer 16y ago
But this hack that GS created -- bypassing the 500 shareholder limit by creating a company that owns a stake in FB and then selling shares of said company -- completely undermines the law. This is a temporary loophole that will be fixed. I don't begrudge facebook a thing. They get most the upside of an IPO with nearly none of the downside. But to act that it's perfectly alright because, hey, caveat emptor... i disagree strongly with that.
brc 16y ago
I don't want to disagree with your main point, but it's wrong to link risk and return so closely, as though one always brings the other. Just because there is a lot of risk doesn't mean there will be a lot of return. Risk is simply the likelihood that you will get your original money back, plus any return. The higher the risk, the higher the chance you won't get any return or indeed your original capital. While this often means that people will only take on risky investments if there is a chance of high return, the way it reads is that all you need to do is create some risk and your returns wil flow. It's entirely possible to have high risk, low return and low risk, high return. However I agree entirely that SEC always fights the last war like the French building the Maginot line, and that this type of innovation is just a response to the Sarbox rules.

patrickgzill 16y ago

I don't know if Goldman did this, but Morgan Stanley did: they sold silver bullion to their clients, then charged them an ongoing storage fee to hold the bullion on their behalf in their vault. Problem was, as it came out, that MS never actually bought the bullion and thus was charging storage fees on non-existent items. If you went to remove or claim your silver, they just gave you cash as settlement, making the scam opaque. The cynic in me says GS will do something similar, like put a very high valuation on the FB units they sell, both marking them up a great deal over what they paid FB for it AND inventing some of the units out of whole cloth (i.e. issuing 10,000 units for sale when they only bought enough FB for 1,000 units), then, over time, the FB units will be seen to "decline" in value and GS will pocket the profits twice, first on the markup of the units, then on the decline.

fleitz 16y ago
This process is essential to what the banking industry does. Banks are one of the few institutions authorized by law to do this. When you deposit money in a bank, they create 9X the loans of what you've deposited. I'd bet if you read the fine print on the MS offering it would tell you that this is exactly what they were doing. MS & GS are too smart and too big of a target to engage in outright fraud.
- borski 16y ago
  True, Enron was tiny.
- xenophanes 16y ago
  > When you deposit money in a bank, they create 9X the loans of what you've deposited. Source? I thought what they did is loan out 90% of what you deposited.
  - patrickgzill 16y ago
    I think the poster is talking about re-deposits and how, recycled, that can end up being a multiple of what is deposited. Example: you deposit $1000 in a bank with 10% reserve policy ($100 set aside as capital reserve of the bank). Bank loans out $900 to customer for new office furniture; then that money is used to pay the office store, which is another depositor at the bank - which then counts as another deposit, 10% of which is set aside as reserve ($90). Another loan of $810 is then made, etc.

rmrm 16y ago

a company I recently left ran up against this same 500 shareholder rule. To get back down comfortably below 500, they performed a substantial reverse split, which caused many former employees to be taken down below 1 share. Apparently at that level, the company can cash them out as you can't hold only a fraction of 1 share. Once those former employees were rounded into nothingness, they performed a forward split to restore everything to their previous levels. I thought that was a rather clever workaround.

known 16y ago

Govt fears big companies.