Goldman Sachs Group Inc’s decision to scuttle a sale of Facebook Inc shares to US investors shows the bank miscalculated by trying to privately offer stock in a company with more than 600 million users.
In a statement yesterday, New York-based Goldman Sachs said the sale, first reported on January 2, will be restricted to non-US investors because “the level of media attention might not be consistent with the proper completion of a US private placement under US law.” The firm planned to sell as much as $1.5 billion of closely held Facebook shares to clients of its private wealth unit.
US securities laws restrict advertisements and solicitations of stock offered in private placements, a type of sale that requires less disclosure because only sophisticated investors can participate. That prohibition clashed with the public’s interest in Facebook, an internet social-network whose creation in 2004 is the subject of a hit movie, “The Social Network,” that won four Golden Globe awards on January 16.
“You would have thought that this was an issue from the start, they should have realised this up front,” said Peter Hahn, a lecturer in corporate finance at Cass Business School in London. “If I invited my 500 best friends to a party, would it be a secret? And the answer is no.”
The setback comes six months after Goldman Sachs, the most profitable firm in Wall Street history, paid $550 million to settle civil fraud charges brought by the US Securities and Exchange Commission over the 2007 sale of a mortgage-linked investment called Abacus. The firm said it made a “mistake” by failing to disclose to investors that a hedge fund was involved both in structuring the investment and planning to bet against it. The bank is scheduled to report 2010 earnings on January 19.
Offering documents
In the Facebook deal, Goldman Sachs and funds managed by the firm agreed to invest $450 million in Facebook, along with an additional $50 million from Russia’s Digital Sky Technologies, before the bank began soliciting wealthy clients about investing in a special purpose vehicle that would hold additional shares.
A four-page offering document that was provided to private wealth clients in early January and obtained by Bloomberg News said that Goldman Sachs could “at any time” reduce its Facebook stake through hedging or sales without notifying investors. The same document said that investors in the special purpose vehicle would be subject to “significant restrictions” limiting their ability to sell stakes.