Darrell Hudson

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Facebook Deal Spurs Inquiry

Amplify’d from www.wallstreetjournal.com

The Securities and Exchange Commission has begun examining whether disclosure rules for privately held firms need to be rewritten as a result of recent deals allowing investors to buy shares in Internet companies such as Facebook Inc. and Twitter Inc., according to people familiar with the situation.

The review is at an early stage, these people cautioned, and SEC officials looking at the recent deals haven’t concluded that any of them run afoul of the 47-year-old rules governing private companies. The rules require firms with 500 or more shareholders of record in a given type of stock to publicly disclose certain financial information. The requirement is designed to protect investors from risking money on companies that say little about their operations and performance.

Still, Facebook’s agreement with Goldman Sachs Group Inc. to create an investment vehicle that will allow some of the securities firm’s richest clients to buy as much as $1.5 billion of equity in Facebook is causing the SEC to re-examine a key dividing line between public and private companies.

Facebook’s Friends

How Goldman Sachs is helping investors squeeze into privately held Facebook.


In addition, Facebook is getting a $500 million infusion from Goldman and Russian investment company Digital Sky Technologies. That would give DST slightly less than a 10% stake in Facebook, people familiar with the situation said. Goldman would own a roughly 0.8% stake, and if the special-purpose goes through, its clients would own a combined 3% of the social-networking firm. Facebook President and CEO Mark Zuckerberg owns about 25%.


SEC officials plan to scrutinize special-purpose vehicles like the one being created by Goldman and Facebook to determine if they are being designed primarily to circumvent the so-called 500-shareholder rule. Here, the headquarters of Facebook in Palo Alto, Calif.

Facebook already has taken steps to avoid breaching the current rules. Employees aren’t allowed to sell any of their shares in the company, and employees hired since 2007 are granted restricted stock units that have no value unless Facebook goes public or is acquired. A Facebook spokesman has said the moves were designed “to better comply with insider trading laws and to protect the interests of the company and its employees and shareholders.” Facebook got an exemption from the SEC in 2008 that excludes the restricted stock units from counting toward the 500-shareholder limit.

Clients approached by Goldman about investing in Facebook must decide by the end of this week if they are interested, according to people familiar with the matter. “It’s hard to imagine how this thing is going to make money,” said one Goldman client who has been approached by the firm. Still, the deal is “an attractive opportunity,” the client said.

In a post on Facebook, Salesforce.com Inc. Chief Executive Marc Benioff, who took the San Francisco-based Internet software company public in 2004, wrote: “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.” A Salesforce spokeswoman said Mr. Benioff wasn’t immediately available for comment.

Goldman is following in the footsteps of several small brokerage firms that have popped up in recent years to take advantage of rabid investor interest in private Internet companies.

Read more at www.wallstreetjournal.com



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