William Cohan has a nice post up on this week’s deal between Goldman Sachs and Facebook. Part of the agreement involves Goldman selling $1.5 billion in Facebook stock to the investment bank’s private clients (that is, rich people).
The structure of the transaction will help Facebook get around some inconveniences. Facebook wants more investors. But it is not a publicly traded company, so it faces restrictions on selling shares. For one thing, Facebook is not supposed to have more than 499 stock investors. If it wants to sell stock shares broadly, it is supposed to register with federal authorities and release information about itself publicly and regularly.
Facebook doesn’t want to do that. Goldman is helping the social network avoid this dilemma by selling shares, not in Facebook to the bank’s private clients, but, more likely, shares in one large Goldman investment vehicle whose only investment is, well, the Facebook shares. That way, Goldman turns hundreds or thousands of investors into one investor.
The problem is, though, that we’re inching toward a financial world comprised not of public exchanges but of private agreements like this one.
A public financial marketplace is integral to capitalism. In an open and free marketplace, millions of investors with competing agendas can jostle to determine what Facebook is really worth, from nothing to hundreds of billions of dollars. Many people will be wrong, but chances are better that everyone won’t be wrong all at once.
Under this deal, by contrast, just a handful of people at Goldman and its advisory and auditing firms will have an outsize say in what Facebook is “worth” on behalf of investors. Chances are greater that this roomful of people, whose bias is (probably) for Facebook to increase in value, will make a catastrophic mistake.
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