CEO and founder of Facebook, Mark Zuckerberg, has infamously declined unthinkable amounts of money to keep his treasured social networking site private. Now, it seems it may be out of his control due to the Securities Exchange Act of 1934, Rule 12g5-1(b)(3) that requires companies with more than $10 million in assets and 499 shareholders to register as public companies. Facebook has recently been valued at $50 billion by Goldman Sachs, and has agreed to sell $1.5 billion worth of its stocks to elite Goldman clients, possibly putting the shareholder count over 500.
The reason I say “possibly” is because according to Andrew Ross Sorkin of the New York Times, Goldman is attempting to create a “special purpose vehicle” that will only count itself as one investor since the offering will be managed by the firm, even though money could be pooled from many other clients.
Although this could be a potential loop hole, in Section B of the rule it states (in more confusing terms) that if the primary reason for creating the “special purpose vehicle” is to get around the rule’s constraints, specifically the shareholder limit, then each Goldman client who gets involved will be considered an individual shareholder in the company, pushing Facebook’s number over 500.
Via an article on MSNBC.com, top securities law professor Adam Pritchard says “If Facebook is selling to [Goldman] knowing this is going to happen, then they are on their way to having to register the company as a public company with the SEC.”
An important note though: Just because Facebook will have to register as a public company does not mean they will have to offer stock to the public. They WILL have to disclose their financials though, including profits, revenues, top executive hires and departures, etc. Many who are informed about the subject suggest that if Facebook has to disclose their financials and register through the SEC, they might as well issue second-class (non-voting) shares to the public.
Going public and trading shares can be dangerous for some companies. Read “Facebook likely to go public in 2012” on CNN.com to learn a little more about why the author will not rush to hold stock in Facebook.
I recommend you read them too in order to get a better grasp of why Facebook may have to go public and what the possible effects are for “The Social Network.”