Facebook, a company whose CEO claims to have more money than it knows what to do with, has reportedly just received a half billion dollars in venture capital from Goldman Sachs and a Russian company, Digital Sky Technologies, which already was a Facebook investor.
According to The New York Times, which broke the story, Goldman values Facebook at $50 billion (slightly less than the $56 billion value estimated by analyst Henry Blodget) and plans to use its investment as a way for some of its wealthier clients to profit from what is -- next to Google -- the strongest Internet company in the world today.
If you have to ask...
As we reported earlier, Facebook has been growing in value as more wealthy investors buy shares in the secondary private placement market. This market, by the way, is closed to anyone not considered an "accredited investor."
That means anyone with less than $200,000 in reported annual income and $1 million in net worth. What this means is that the people who could use a portfolio boost more than anyone, the mass middle class, are pretty much excluded.
SEC probe
Meanwhile, the Securities and Exchange Commission (SEC) is said to be looking into the private equity secondary trading market to make sure this inflow of investors into Facebook and other hot privately held social networking companies isn't violating SEC rules.
Specifically, the commission is reportedly inquiring into whether the funds raised to invest in companies like Facebook qualify as a single investor so it can maintain the less than 500-shareholder rule, or does every underlying investor count?
The SEC is also allegedly looking into whether these funds actually have non-public financial information upon which their underlying investors can make informed decisions and, if not, if there are there any investor protection rules being broken. Here the SEC claims to be looking out for the uninformed wealthy investors who continue to be taken advantage of.
The Times also says Goldman Sachs is expected to raise as much as $1.5 billion from investors for Facebook at the $50 billion valuation. It quotes people involved in the discussions as saying the transaction was not supposed to be made public until the fund-raising had been completed.
Goldman was planning to create a "special purpose vehicle" to allow its high-net-worth clients to invest in Facebook, according to the report.
Passing muster?
So, how is all this going to sit with the SEC which, as mentioned, requires companies with more than 499 investors to disclose their financial results to the public? Sources tell the Times that Goldman's proposed special purpose vehicle may be able get around such a rule because it would be managed by Goldman and considered just one investor, even though it could conceivably be pooling investments from thousands of wealthy clients.
The question then comes down to whether the SEC will decide to rule that this whole thing is a sham disguised to allow the rich to get richer and prevent everyday small investors from taking advantage of an investment opportunity that could reap billions. Up to now, most of this has been going on in the shadows without most people even aware of the private equity secondary market.
Even if the SEC finds the company in violation of the 500-shareholder rule, all that means is that Facebook is required it to publicly disclose certain financial information.
As Facebook CEO Mark Zuckerberg has said, his company has no need for any more capital, which is the main reason a company goes public with an IPO. Remaining private, even if it has to disclose financials, allows it to avoid the many obligations public companies face such as having to meet with analysts and hedge funds, and do quarterly earnings calls.
There are some who think the Goldman deal makes an IPO less imminent, even though it puts Goldman in a very strong position to take Facebook public when and if it ever decides to do so.
