Facebook wanted to remain a privately held company and it was getting too close to the 500-shareholder limit. Actually, it was over that size limit, but the SEC gave it an exemption in 2008 to allow the company to exclude its restricted stock units from the 500-shareholder limit. So, Goldman stepped in as a single investor with its special-purpose vehicle (SPV) and paid Facebook for its shares. Investors then pay Goldman and own a piece of Facebook, rather indirectly. Goldman pools investors’ money into what counts as a single investor. Goldman’s SPV can sell, sell, sell, and what you have is a public company without regulation. Facebook employees and former employees can now sell their shares even though Facebook shares are not publicly traded.Â
Other formerly privately held companies have trod this path. Google went public in 2004 because it could no longer manager the 500-shareholder ceiling. “Oh, but we can retain talent this way!â€Â Does that mean that there are no good employment options in privately held companies? One lawyer noted that these types of firms are “betwixt and between: not quite private and not quite public.â€[1] Ah, but they are more public than private now because those shares are being sold.  Â
The letter of the law vs. the spirit of the law. The loophole that lets you get what you want, sans the constraints other growing companies face. How many times must we trot in gray areas before we learn the lesson that a loophole exploited results in exploitation? Goldman’s recent settlement for its activities related to the subprime investment vehicles, CDOs, tranches, etc. has not changed the investment banker’s views on trust and transparency.
Â
[1] Jeane Eaglesham and Aaron Lucchetti, “Facebook Deal Spurs Inquiry,†Wall Street Journal, January 5, 2011, pp. A1 and A2.