Goldman's Facebook Fiasco, Or, Stupid Regulator Tricks

Nobody much likes bankers nowadays, and I'm no different. I also try to maintain a healthy skepticism about the surging value of social media companies, since the nascent social media market has many characteristics of a bubble. So it feels odd to be sticking up for Goldman Sachs following its Big Fat Facebook Flop. But this fiasco -- however satisfying it may be in terms of schadenfreude -- strikes me as another instance of pointless, counter-productive regulatory intervention.

Or rather, non-intervention: it appears that Goldman backed off its plans to help Facebook sell stakes worth as much as $1.5 billion in a private offering following hints that it would run afoul of regulators at the Securities and Exchange Commission. No one knows exactly what the lawyers said to the lawyers, behind closed doors, but the gist was that Goldman may have violated SEC rules by vigorously promoting the planned sale earlier this month and attracting media attention. In any event, whatever was said was alarming enough to cause Goldman to execute a humiliating about-face by limiting the offer to overseas investors, leaving its American private investing clients in the lurch.

Now, I know that basically no one wins against the Feds, especially when they choose to exert their authority through threats rather than actions; the cost of legal proceedings is enough to deter most private entities from proceeding against the government's wishes, even if they are in the right. I also freely admit I don't know about the legal intricacies of public and private stock offerings. But speaking for all the hapless, hopless laymen out there, there are a couple things about the Goldman Facebook fiasco which just don't make much sense to me.

First, it seems odd that businesses like Goldman and Facebook should be discouraged from pitching a product they are trying to sell. According to the Wall Street Journal, "U.S. law doesn't allow private placements to be advertised or solicited publicly" -- I imagine to prevent financial swindlers from fleecing little old ladies who watch too much business news. But I have seen no evidence that Goldman was deliberately feeding information to the news media to create a publicity frenzy; indeed, "clients signed confidentiality agreements prohibiting contact with the news media," according to the WSJ, sealing off one potential escape route for unwanted publicity, or at least trying to. Meanwhile Goldman execs would be foolish to court regulatory action by breaking the rules themselves (not that it's impossible, but it seems unlikely given Goldman's reputation for relative probity and restraint) ahead of such a potentially lucrative deal.

According to some financial analysts, the real reason the SEC waved its stick at Goldman is that regulators are unhappy about the rapid expansion of non-public markets which serve as clearinghouses for shares in privately-held companies -- allowing brokers, investors, and speculators to skirt many of the regulations governing publicly-traded companies.

Goldman's plan to offer Facebook stakes to private investors through a "special investment vehicle" certainly fits this description. But the same analysts point out that there is really nothing illegal, (under current laws, at least) about these ad hoc private investment mechanisms. This, in turn, suggests that the SEC regulators just don't like them because they might not fall under their authority -- and seized on a small, tangential issue to stamp out this pocket of resistance on Wall Street.

As noted no one ever beats the Feds, so this is all moot. But it's worth noting that, as with any regulatory sally, there could be some unexpected consequences. By preventing private investors from taking stakes in Facebook, the SEC may force the social network to move up its schedule for an eventual IPO -- just as the market (as reflected in media reports and valuations of other social networks) is beginning to assume the drunken aspect of a Dionysian bubble. So far the only people at risk of losing their shirts in this bubble have been venture capitalists and other wealthy private investors. But the Facebook public stock offering, whenever it happens, will probably kick the bubble dynamic into high gear, as hordes of day-traders (many of them inevitably less well-informed than Goldman's rich private clients) bid up the price of all kinds of weird social media startups and copycats. I thought the SEC was supposed to prevent this kind of thing from happening?

4 comments about "Goldman's Facebook Fiasco, Or, Stupid Regulator Tricks ".
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  1. Juliette Cowall from Godwin Plumbing & Hardware, January 19, 2011 at 11 a.m.

    If the "rich private clients" bid the share price up privately, than little investors would be priced out before any eventual public offering.

  2. Stephen Rowe, January 19, 2011 at 11:42 a.m.

    On the other hand Juliette, if the "rich private clients" are forced to sit on the sidelines per the regulators, the company will be getting less than it could for the public offering and runs the risk of being under-capitalized as a result.

  3. Bruce May from Bizperity, January 19, 2011 at 11:52 a.m.

    This isn't about rich investors vs. little investors so much as it is about the government not being able to think strategically. How could the government create a situation where only private foreign investors have the opportunity to buy into one of the most important American companies in the world? This result can't be labeled an "unintended consequence" but only as government stupidity on a grand scale. So "rich private Americans" are so vile and despicable now that the US government would rather advance the interests of "rich private foreigners"? Give me a break.

  4. Curtis Bahr from TBWA/Chiat/Day, January 19, 2011 at 1:47 p.m.

    Against my better judgment, I think the SEC is getting it right this time. Goldman's "special investment vehicle" is specifically designed to bypass the Fed's rules for public disclosure. Any company with over 500 investors has to begin giving guidance and releasing finiancial data. The SIV skirts the issue by Goldman being the only "investor" on paper and then they sell bonds (rather then shares). I have to think that Facebook is going out of it's way to hide the balance sheets and I rather they fleeced foreign investors than those here.

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