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Facebook’s Stealth IPO

January 5, 2011

Today is quite a news day on several fronts, but I will limit to two observations:

Congress:

The 112th Congress will be sworn in, and of the 535 members of Congress, 202 have law degrees and of the same 535 members, 209 have a finance banking background (see today’s Wall Street Journal, page A5).  Over the course of the next several weeks, I will continue to reflect on the make up of Congress.

Facebook:

To go public or not to go public.  Again, more observations in the coming weeks; however, it will be fascinating to watch the dance between Goldman Sachs, Facebook and the Securities and Exchange Commission.

The 1934 Securities Exchange Act dictates that companies with 500 or more shareholders need to make certain financial information publicly available.  Goldman Sachs is creating a “Special Purpose Vehicle” to own its recent $500 million share of Facebook, which is considered a single shareholder under current SEC rules.  However, Goldman Sachs will then offer interests in this Special Purpose Vehicle to its most valued clients.  Does this circumvent the 1934 Securities Exchange Act?  Undoubtedly, Goldman Sachs has competent counsel and is fully aware of the workings of the 1934 Securities Exchange Act.  This very well may a be a new creative way to expand the investor base of companies that don’t want to go public — yet.

Mark Zuckerberg, at 26 years old, is perhaps simply not ready (by choice) to take on the role of CEO / Chairman of a major public company.  I don’t blame him.  This may be a very wise move by Mr. Zuckerberg to slowly ease into the role and responsibility of running a major public company.  Facebook, in relative terms, was effectively just born — the equivalent of Bill Gates creating the first prototype of a PC.  Yet, Facebook is purportedly worth $50 billion.  Bill Gates probably didn’t even dream that big six years after he created the first prototype, but here is Facebook, effectively still in a $50 billion garage!

A greater question is what does this mean to the future of public markets, venture capital, entrepreneurial efforts and the ability of individuals who do not have Goldman, JP Morgan, etc accounts?  Is the general investing public now effectively looking through a glass ceiling of opportunities that, in days past, they could access through their brokerage accounts, IRAs and 401(k)s?

I hope that is not case but will admit, as creative as this structure may be, it gives me pause looking to the workings of our economy.  Our economy, even with all its flaws, is still the best in the world and only works best when all who want access, may have access.

More soon…

P.S. – Excellent editorial by Hank Greenberg in today’s Wall Street Journal: http://on.wsj.com/hcF8hO

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