Will The Facebook Fund Pave The Way For Other Companies To Remain Private?
Facebook seems to be straddling the fine line between public and private markets. Recently, Goldman Sachs (NYSE: GS) approached its best private wealth clients with quite an intriguing offer, which will allow them to invest in a fund that will own shares of Facebook. This is a win-win situation for both Facebook and Goldman because the partnership allows Facebook to remain private while Goldman and its best clients get a piece of the social networking giant.
According to a recent report the SEC is now trying to determine whether it can crack down on companies and investors who are trying to potentially evade the rules on the books, or if the rules may possibly need clarification.
The goal of smaller companies is typically to launch an IPO, though many regulations have recently made it less appealing that previously. New forms of investment and technology have now made going public less attractive. This has recent given way for trading platforms that match buyers and sellers of privately held companies. SecondMarket is one such example.
The SEC requires that if a company's private shares are held by more than 500 holders of record, the company is required to register with the SEC and file public disclosure statements. The rules generally define the term "record holder" as the name displayed on the stock record and not the beneficial owner of the stock.
This basically allows companies such as Goldman Sachs to create special vehicles in order to escape regulations. These vehicles allow multiple investors to own the stock while the only owner showing up as the record holder is Goldman Sachs.
One can see why the topic has been under scrutiny. It creates a way for hot companies like Facebook, Groupon, and LinkedIn, just to name a few, to avoid going public while still gaining new investors. The rising popularity of secondary trading markets also contributes to the problem as well. According to the report, several securities law experts note the Facebook fund, if unchallenged, could have major ramifications for other private companies and for Wall Street.
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