Egg on Hart?s Facebook column: Deal isn?t the end of capitalism
www.waltonsun.com
February 20,2011
Social media has become an essential part of 21st century life around the world. The Egyptian people ended the Hosni Mubarak regime, and instrumental in their success were social media sites like Facebook and Twitter. I was shocked and awed when Ron Hart claimed last week that Facebook?s private placement heralded the end of capitalism. As Paul Harvey said, ??and now page two.?
Facebook owners wanted to raise money by selling shares of their company to the public. They followed the usual track entrepreneurs take by enlisting Wall Street investment banks. Goldman Sachs was the winner. The plot thickens a bit here. Mr. Hart implied some brand-spanking new regulations thwarted Facebook?s plans, but the law applicable for this situation has been around since ? 1933.
Before we lament stringent Wall Street regulations, please don?t forget this is the same Goldman Sachs that exploited the loose regulatory atmosphere during the housing bubble. To settle a Securities and Exchange Commission lawsuit dealing with collateralized debt obligations, Goldman paid the largest fine in history, $550 million. In this situation, Goldman Sachs set up CDOs with lowquality mortgages, passed them off to investors as high quality and took out positions betting the CDOs would collapse.
And now, page three: Critically omitted from his column was the salient fact that Facebook?s offering was not public, but rather a private placement. Goldman?s original proposal would have set up a single fund for investors and this fund would count as one investor, irrespective of the actual number. Facebook wanted to keep the number of investors low (even if it meant ignoring math) in order to avoid detailed financial and accounting disclosures required when there are 499 or more shareholders. For the record, the 499-investor rule has been around since ? 1964. Federal regulations demand a high level of financial disclosure so investors can weigh risk for a public offering of stock and those regulations have been around since ? 1933.
Another private placement regulation, going back decades, is no ?general solicitation? of shareholders. With Facebook, no one has secrets, so information about the deal leaked out. A standard private placement of stock quietly offered to a few clients would have attracted no attention from regulators, but Goldman chose another route.
If you read his column, you probably felt chagrin and disappointment at your loss; however, only ?accredited investors? who could pony up $2 million were eligible. Do not be sad, not participating might be a good thing. Based on Goldman?s initial investment, Facebook shares will be trading at fifty times revenue compared to Google?s current price, which is six times revenue (Wall Street Journal). Of course, Goldman Sachs can throw money around, since they can borrow cheaply from the Federal Reserve. Goldman?s access to cheap funds, like banks, is a direct result of legislation signed by renowned socialist politician: George W. Bush.
The Dodd-Frank bill does open the door for disclosure of any conflicts of interest stockbrokers and insurance agents have. Registered Investment Advisors already must disclose any conflicts of interest to their clients. However, the bill does not address writers who fail to disclose conflicts of interest.
According to his website, Ron Hart?s former boss was ? Goldman Sachs.Good day.
Buz Livingston is a certified financial planner. Buz@ LivingstonFinancial.net?
www.waltonsun.com
February 20,2011
Social media has become an essential part of 21st century life around the world. The Egyptian people ended the Hosni Mubarak regime, and instrumental in their success were social media sites like Facebook and Twitter. I was shocked and awed when Ron Hart claimed last week that Facebook?s private placement heralded the end of capitalism. As Paul Harvey said, ??and now page two.?
Facebook owners wanted to raise money by selling shares of their company to the public. They followed the usual track entrepreneurs take by enlisting Wall Street investment banks. Goldman Sachs was the winner. The plot thickens a bit here. Mr. Hart implied some brand-spanking new regulations thwarted Facebook?s plans, but the law applicable for this situation has been around since ? 1933.
Before we lament stringent Wall Street regulations, please don?t forget this is the same Goldman Sachs that exploited the loose regulatory atmosphere during the housing bubble. To settle a Securities and Exchange Commission lawsuit dealing with collateralized debt obligations, Goldman paid the largest fine in history, $550 million. In this situation, Goldman Sachs set up CDOs with lowquality mortgages, passed them off to investors as high quality and took out positions betting the CDOs would collapse.
And now, page three: Critically omitted from his column was the salient fact that Facebook?s offering was not public, but rather a private placement. Goldman?s original proposal would have set up a single fund for investors and this fund would count as one investor, irrespective of the actual number. Facebook wanted to keep the number of investors low (even if it meant ignoring math) in order to avoid detailed financial and accounting disclosures required when there are 499 or more shareholders. For the record, the 499-investor rule has been around since ? 1964. Federal regulations demand a high level of financial disclosure so investors can weigh risk for a public offering of stock and those regulations have been around since ? 1933.
Another private placement regulation, going back decades, is no ?general solicitation? of shareholders. With Facebook, no one has secrets, so information about the deal leaked out. A standard private placement of stock quietly offered to a few clients would have attracted no attention from regulators, but Goldman chose another route.
If you read his column, you probably felt chagrin and disappointment at your loss; however, only ?accredited investors? who could pony up $2 million were eligible. Do not be sad, not participating might be a good thing. Based on Goldman?s initial investment, Facebook shares will be trading at fifty times revenue compared to Google?s current price, which is six times revenue (Wall Street Journal). Of course, Goldman Sachs can throw money around, since they can borrow cheaply from the Federal Reserve. Goldman?s access to cheap funds, like banks, is a direct result of legislation signed by renowned socialist politician: George W. Bush.
The Dodd-Frank bill does open the door for disclosure of any conflicts of interest stockbrokers and insurance agents have. Registered Investment Advisors already must disclose any conflicts of interest to their clients. However, the bill does not address writers who fail to disclose conflicts of interest.
According to his website, Ron Hart?s former boss was ? Goldman Sachs.Good day.
Buz Livingston is a certified financial planner. Buz@ LivingstonFinancial.net?
