How Goldman Sachs will guard Facebook's privacy

Special 'investment vehicle' likely to draw attention from SEC

Mark Zuckerberg

No one should ever again question Mark Zuckerberg's commitment to privacy ... at least not as it applies to himself, his company, his employees, Goldman Sachs and millionaire investors.

Headlines since yesterday have trumpeted the fact that Facebook and Goldman Sachs are in the process of raising $450 million for the social networking giant via private trading markets that are the exclusive domain of the extremely wealthy. The goal is to avoid - or at least delay - an initial public offering that would open the company's books to public scrutiny.

The snag for Facebook arises with a Securities and Exchange Commission regulation that stipulates financial disclosure requirements for any company, even those privately held, once its number of investors exceeds 500. The rule dates to 1934, and while they may not have had the Internet back then they were sharp enough to anticipate shenanigans. From the DealBook blog of the New York Times:

Goldman will form a special purpose investment vehicle for its super-wealthy clients to invest in Facebook.

Technically, there would then be only one shareholder of record here, the investment vehicle. However, the S.E.C. has anticipated this type of runaround. The S.E.C.'s definition of record holder also states that:

"If the [company] knows or has reason to know that the form of holding securities of record is used primarily to circumvent the provisions of [the Securities Act], the beneficial owners of such securities shall be deemed to be the record owners thereof."

Seems clear enough, but there is a comment attached to the post from a reader claiming to be a securities lawyer and he offers that the actors "may not be cutting it so close as this article makes it seem."

Maybe, but such an end run around the spirit of the law would reek and undoubtedly draw attention from the SEC, which is already looking at the increasingly popular country-club investment markets.

Irrational exuberance, anyone?  

Dan Gillmor expounds on the theme here.

And the Wall Street Journal explains how Goldman Sachs will rake in the dough without really assuming any risk.

Meanwhile, we get to press our noses against the window.

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