Goldman's Stinky Facebook Deal

Got two different notes from readers this morning about this latest Goldman gambit involving Facebook shares. It seems that Goldman has set up a "special purpose vehicle" and alerted top
clients that through this SPV they will have the opportunity to invest in an as-yet-unnamed company, which reportedly is Facebook.

The way this looks to Felix Salmon over at Reuters, and his explanation makes a lot of sense to me, is that this SPV is potentially a way around SEC reporting requirements for publicly-traded companies. Here's the Dealbook explanation of this phenomenon (any Dealbook opinion on Goldman is interesting in its own right, but more on that some other time):

In a rare move, Goldman is planning to create a “special purpose vehicle” to allow its high-net-worth clients to invest in Facebook, these people said. While the S.E.C. requires companies with more than 499 investors to disclose their financial results to the public, 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 clients.



Salmon takes this explanation one step further, imagining how this setup might be run via a fictional vehicle called Status Upgrade:

Since you need to be rich and special to become a Goldman client and therefore eligible to
invest in this vehicle, let’s call it Status Upgrade. Status Upgrade will then buy 30 million
shares of Facebook for $1.5 billion, and issue 30 million shares of its own to its investors, all
Goldman clients. Status Upgrade will be a firm which invests in other firms, a bit like Berkshire
Hathaway, except it won’t be publicly listed, and it will only invest in one company, Facebook.



Goldman will then act as a middleman between its clients who want to buy and sell shares in
Status Upgrade.

Now back to the Times report, which notes that the SEC has been looking into the
sale of shares in internet companies on the private market:

The new investment comes as the Securities and Exchange Commission has begun an inquiry into the
increasingly hot private market for shares in Internet companies, including Facebook, Twitter, the
gaming site Zynga and LinkedIn, an online professional networking site. Some experts suggest the inquiry is focused on whether certain companies are improperly using the private market to get around public disclosure requirements.



There's an argument to be made that this isn't a big deal, and that there shouldn't be laws protecting investors who might blindly buy something like Status Upgrade from their own stupidity. But the whole thing kind of stinks to me.

It was bad enough when we had a speculative bubble based on IPOs of internet companies about which investors, foolish as many of them were, actually had some concrete information. But now I'm imagining what mischief might ensue if investment banks are allowed to completely bypass disclosure requirements and set up de facto auctions for shares in companies whose true financial situation is a complete mystery to everyone (well, everyone, presumably, except a few select insiders like Goldman and its high-rollerest clients). You've heard of the non- denial denial; this is sort of like the non-public initial public offering.

Not that I don't admire the creativity Goldman needed to dream up this nifty end- around. But to me this just looks like a funky retro take on many of the IPO scams of the late nineties and early 2000s, where the investment bank sucks in herds of overstimulated investors, hides the true value of the firm in question from everyone, and then roasts the whole cattle-crowd of wealth-seekers to a crisp through fees and commissions and hidden markups.

Back then the carrot was a wave of excited news-media coverage about the "new paradigm" that was going to make financial behemoths out of every online university for dogs or web-based dental floss warehouse that came up the IPO pipeline. This time around it's fantasies like the notion that Facebook is somehow worth fifty billion dollars (it's been interesting to watch which news outlets credulously report that figure). I mean, maybe it is worth that much, who knows., but... I'm gonna let
someone else find out.

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