The wait is over!
Facebook is going to have to register as a public company – and soon.
At least, that's the highly educated opinion of Michigan law professor Adam Pritchard, one of the top securities law professors in the country and author of the authoritative text book, "Securities Regulation: The Essentials."
The answer is the Securities Exchange Act of 1934, rule 12g5-1(b)(3), of course.
For those not blessed with immediate and total recall of all acts of Congress, let us explain.
The SEC requires companies with more than $10 million in assets and 499 shareholders to register as public companies.
Importantly, this does not mean that these companies have to list on the public markets, just that they have to disclose their financials – stuff like profits, revenues, and top executive hires and departures.
Today, it was reported that Facebook has agreed to allow Goldman Sachs to sell $1.5 billion worth of its stock at a $50 billion valuation to high net worth Goldman clients. It's expected the private offering will sell out.
You'd think this would put Facebook's shareholder count well above 500.
According to the New York Times, however, Goldman and Facebook have a plan to get around this limit.
Andrew Ross Sorkin writes that "Goldman is planning to create a 'special purpose vehicle' to allow its high-net-worth clients to invest in Facebook."
"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."
Clever – and close ... but no cigar
Our top securities law professor, Adam Pritchard, doesn't think Goldman's plan is going to work.
Let's go through Rule 12g5-1 of the Securities Exchange Act of 1934 for the answer.
(Bear with us. We promise securities law has never been more dramatic.)
Rule 12g5-1 starts out sounding very optimistic for Goldman and Facebook's plans. Section A reads …
"For the purpose of determining whether an issuer is subject to [the 500 shareholder limit that would requirement it to disclose financials] securities shall be deemed to be "held of record" by each person who is identified as the owner of such securities on records of security holders maintained by or on behalf of the issuer, subject to the following. … Securities identified as held of record by one or more persons as trustees, executors, guardians, custodians or in other fiduciary capacities with respect to a single trust, estate or account shall be included as held of record by one person."
Translation: A trust or corporation – or "special purpose vehicle," in Goldman's parlance – can be considered a SINGLE shareholder, even if it has multiple beneficiaries, as Goldman's "special purpose vehicle" will. All the Goldman clients who buy Facebook shares are "beneficiaries."
So far, Rule 12g makes it sound like Goldman and Facebook are in the clear. Party for Mark Zuckerberg, who never wants to have to share any of Facebook's financials!
But wait, Rule 12g5-1 goes on – with a twist!
Section B, paragraph 3 reads…
"Notwithstanding paragraph (a) of this section…If the issuer [Facebook] knows or has reason to know that the form of holding securities of record is used primarily to circumvent the provisions of Section 12(g) or 15(d) of the Act, the beneficial owners of such securities shall be deemed to be the record owners thereof."
If the primary reason Goldman created the "special purpose vehicle" was to avoid crossing Facebook's 500 shareholder limit, then Goldman's many clients are all each considered individual shareholders in the company.
Says Professor Pritchard: "If Facebook is selling to [Goldman] knowing this is going to happen, then they are on their way to having to register the company as a public company with the SEC."
A reminder: If Facebook is forced to register, it will not HAVE to offer stock to the public. But since it will be forced to disclose its financials anyway, we expect the company will go ahead and offer up some second class (non-voting) shares.
So what's going on?
Didn't Mark Zuckerberg want to wait until 2030 (or never) to go public?
Here's what we would speculate happened:
Thanks to it's popularity on secondary markets and an SEC investigation into that popularity, Facebook has finally resigned itself to an IPO. It shopped the IPO to the major investment banks.
Goldman won because it promised to raise $2 billion for Facebook at an incredible $50 billion valuation. Smartly, Goldman decided not to pour its own $2 billion into Facebook, but turn around and offer its clients "pre-boarding" into the IPO through this "special purpose vehicle."
It gets the IPO and a flashy product its private wealth clients will go nuts for.
Goldman Sachs and Facebook both declined to comment on this story.