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Goldman Banishes US Investors From Facebook Party

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Goldman Banishes US Investors From Facebook Party

By Rob Spiegel
E-Commerce Times
01/18/11 12:15 PM PT

Goldman Sachs just uninvited all its U.S. clients to participate in the most exciting private offering going — its investment in Facebook. “The U.S. investors got hosed in the deal,” said Charles King, principal analyst at Pund-IT. “The level of interest was huge. Having to withdraw the offer from the U.S. investor base now can’t be seen as anything but a huge embarrassment for Goldman.”

Goldman Sachs is going to exclude its U.S. clients from buying shares of its recent investment in the booming social network Facebook. The bank decided to go overseas because of intense media scrutiny surrounding its offering. The press coverage of the offer to its U.S. investors could be seen as a general solicitation or advertisement, which is illegal in a private placement, whether or not Goldman intentionally leaked its memo to U.S. investors in the beginning of January.

Plus, Goldman was close to getting cross-ways with the Securities and Exchange Commission as Facebook neared the 500-investor trip line that will force it to publicly release financial Enterprise Payment Security 2.0 Whitepaper from CyberSource data.

Goldman is now offering about 70 percent of its Facebook stake to foreign investors in order to avoid flying in the face of the SEC’s rules.

Facebook is expected to introduce an initial public offering by 2012. The company was recently valuated at US$50 billion, based on the Goldman Sachs and Digital Sky Technologies joint investment of $500 million.

Neither Goldman nor Facebook responded to the E-Commerce Times’ requests for comments by press time.

Too Much Information?

Perhaps Goldman should have made a greater effort to tone down the buzz over its deal.

“In hindsight, Goldman Sachs should have kept Facebook’s private offering private,” Azita Arvani, principal of the Arvani Group, told the E-Commerce Times. “Instead, they seemed to be basking in the glory of getting the hottest deal in town.”

Goldman appears to have gone a bit wild, losing control over the message.

“First, they made an investment in Facebook [that legitimized] an astonishing $50B valuation,” said Arvani. “Then, as part of their $1.5B offering, they distributed Facebook’s financials and IPO plans to too many investors. So, a leak was inevitable, and their private offering became not so private and risked getting SEC’s regulatory attention.”

Goldman’s decision will help it with the SEC, but its own clients will likely be frustrated at being left out.

“Limiting Goldman’s private offer to foreign investors will not legally challenge Goldman or Facebook,” said Arvani. “But it will certainly not make the U.S. clients of Goldman that might have an interest in the Facebook offer very happy — especially now that these investors are shut out of the deal. They would love to belong to a club that will not accept them as a member. This episode will generate more interest in private secondary markets, which are, of course, controversial.”

Red With Embarrassment

Goldman now has egg on its face for withdrawing a colorful offering.

“The U.S. investors got hosed in the deal,” Charles King, principal analyst at Pund-IT, told the E-Commerce Times. “The U.S. investors were oversubscribed by some $7 billion. When Goldman gets ready to offer an investment to their investors, they put out the word to let them know the shares are available and ask their investors what they want. The level of interest was huge. Having to withdraw the offer from the U.S. investor base now can’t be seen as anything but a huge embarrassment for Goldman.

Goldman found itself between a rock and a hard place. Who do you make unhappy? Your customers or the feds?

“The SEC is taking an increasing interest in these deals for non-public companies that are walking the bleeding edge of what’s legal and not legal,” King said. “I would guess Goldman’s legal counsel took a look at that and decided to risk the public embarrassment of withdrawing the offer from U.S. investors rather than getting the scrutiny of the SEC.”

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