Just about a week after investment banking firm Goldman Sachs offered its richest clients a chance to invest in social media giant Facebook, the firm rescinded the opportunity from clients in the United States. The reason stems from media attention and scrutiny from the Securities and Exchange Commission (SEC), which had opened an inquiry into the structure of the offering.
Goldman had planned to set up a “special purpose vehicle” to allow its richest private clients to invest in Facebook in a plan to raise as much as $1.5 billion. The plan was excoriated in the media as a way to circumvent SEC rules that restrict the number of shareholders a private company can have.
U.S. law prohibits “general solicitation and advertising” in private investment offerings, banning investment banks from publicly advertising its investment offerings. The proposed Facebook deal falls under what is known as a private placement, and the SEC requires banks to solicit investors for such deals only in private. While Goldman didn’t specify which laws it was concerned about, in a statement, the investment bank said they had made the decision on their own and believed it to be “the most prudent path to take.”
“Goldman Sachs concluded that the level of media attention might not be consistent with the proper completion of a US private placement under US law. The decision not to proceed in the US was based on the sole judgment of Goldman Sachs and was not required or requested by any other party. We regret the consequences of this decision, but Goldman Sachs believes this is the most prudent path to take.”
However, the move is widely seen as a major embarrassment to Goldman and a potential blow to Facebook as the bank had reportedly been flooded with requests for Facebook shares, about $7 billion worth. The offering was also likely designed to strengthen Goldman’s tarnished image, too. This surely raises new questions about the firm’s willingness to push regulatory boundaries.
Facebook still stands to benefit heavily though since foreign investors are not covered by the SEC rules and will still be able to participate in the Facebook offering. It’s very likely Goldman will still be able to raise the originally planned $1.5 billion, and maybe even more.