The Goldman Sachs Facebook Deal

The firm’s plan had been to raise about $1.5 billion for the social networking company by allowing individuals to invest in a special fund that would count as a single investor. U.S. investors would be barred from a Facebook private stock offering.
Some critics say the deal was designed to skirt securities regulations and is marred by conflict of interest, while others argue this type of investment puts taxpayers at risk, since Goldman can support its business with cheap government loans. Amid these criticisms, Goldman abruptly changed course on January 17 and announced that, contrary to the original plan, U.S. investors would be barred from a Facebook private stock offering. Many observers saw the move — limiting investment to foreigners — as a serious embarrassment, if not an admission that Goldman had been treading too close to the regulatory line.
Despite the controversy, many experts note that it is not unusual for a big Wall Street firm to take part in deals not open to ordinary investors. Nor is it unusual for such firms to wear multiple hats — investing their own money in deals also marketed to clients, underwriting stock offerings while evaluating stocks for investors, or managing money for corporations and their executives while doing other business involving those firms.
“Investment banks are always looking for innovation; they’re always looking for new markets,” says Wharton adjunct finance professor David Wessels. Often, he notes, that means looking for “ways around existing regulations…. They are paid to be creative.”
The fund will count as one Facebook investor, allowing Facebook to avoid regulations that would require detailed financial and accounting disclosures if it had more than 499 shareholders. This approach, says Wessels, “might follow the letter of the law but it certainly doesn’t follow the spirit of the law.” (Goldman did not respond to requests for comment before Knowledge@Wharton’s publication deadline.)
‘Private Placements’
Still, the Facebook deal was somewhat out of the ordinary from the start, even though Wall Street firms have long been involved in “private placements,” or helping privately held companies sell shares to investors. “This is a little bit different, because it is a fund and they [Goldman] are putting their own money in, so it’s not exactly the same as a private placement,” according to Wharton finance professor Franklin Allen.
“They were able to avoid some of the SEC regulations … by creating a partnership in which there was only one ownership, but ownership could be factored into 500 individual clients,” notes Wharton finance professor Marshall E. Blume. According to Wessels, Goldman is likely to receive “a tremendous amount of pushback” from the SEC, which may see Goldman’s approach as undercutting the transparency requirements that make the U.S. securities markets appealing to investors.
Davidoff believes Goldman and Facebook did adhere to the securities regulations, and that the SEC would have a hard time proving a violation. But he thinks Goldman “blinked” — in its decision to bar U.S. investors from the offering — to prevent the damage its reputation would have suffered in an SEC investigation. Goldman apparently failed to anticipate the criticisms the deal would attract, he says, noting that the firm could have avoided the mess with a standard private placement quietly offered to just a few clients.
Skirting Regulation?
According to Blume, the route chosen by Facebook may simply have been the cheapest way to raise money for the time being. To raise a relatively small sum of $1.5 billion, it makes sense to target wealthy individuals because large institutions have too much money to bother with small opportunities. The special purpose vehicle, Blume says, offers a convenient way to appeal to wealthy individuals, though Goldman and Facebook are using it in an unusual way.
The high price helps set the stage for a high price in any future initial public offering of Facebook. That could make Goldman’s share of Facebook more valuable and boost any fees the firm might earn underwriting the IPO. “I presume they will do an IPO next year,” Allen says. “I think this [current marketing of shares] might be part of an attempt to create demand for it.”
Ultimately, notes Blume, Facebook will have to go public if it is to raise large amounts of money, since a special purpose vehicle cannot be opened to large numbers of investors, and institutional investors want the liquidity and transparency only available after a stock starts public trading.  “A regular endowment fund like the University of Pennsylvania’s, or a pension fund like the State of Pennsylvania’s, would want to be assured of a ready market.”
If Facebook’s share price is inflated, Goldman is making a risky investment, analysts say. That has raised questions about potential conflicts of interest posed by Goldman’s multiple roles in the deal — a problem common to big financial institutions that wear many hats. Goldman’s $450 million investment in Facebook puts Goldman shareholders at risk. In marketing Facebook shares to its clients, Goldman has an incentive to argue the shares will go up in value despite the risk. Goldman, presumably, would also be interested in underwriting Facebook’s public offering, again giving an incentive to accentuate the positive while an objective analysis might see serious hazards.
The other reason is because they can use China Money
January 8, 2011 2 Big Banks Approved For Ventures In China
JPMorgan Chase and Morgan Stanley said on Friday that they had each won approval from Chinese regulators to form joint ventures in the country, potentially giving them a bigger role in China’s booming securities business.
kaupthing bank reveals billions by asset hiders Goldman Sachs, Deutsche Bank, Credit Suisse, Morgan Stanly, Barclays +
Swiss whistleblower Rudolf Elmer He will disclose the details of ‘massive potential tax evasion
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