Goldman Limits Facebook Investment to Foreign Clients

1:03 p.m. | Updated Just over a week after Goldman Sachs offered its most prized clients a chance to invest in Facebook, the firm rescinded the opportunity from clients in the United States because of worries that the deal would run afoul of securities regulators.

The withdrawal of the offer — which valued Facebook at $50 billion — marks a major embarrassment for Goldman, which had marketed the investment to its wealthiest clients, including corporate magnates and directors of the nation’s largest companies.

Yet Goldman began running into problems almost immediately after The New York Times’s DealBook reported two weeks ago that the firm was working on the Facebook investment. The Securities and Exchange Commission had begun an inquiry into the offering and whether it violated securities laws, raising the prospect that Goldman may again have run into conflict with regulators.
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Federal and state regulations prohibit what is known as “general solicitation and advertising” in private offerings. Firms like Goldman seeking to raise money cannot take action that resembles public promoting of the offering, like buying advertisements or communicating with media outlets.

The firm said in a statement: “In light of this intense media coverage, Goldman Sachs has decided to proceed only with the offer to investors outside the U.S. Goldman Sachs concluded that the level of media attention might not be consistent with the proper completion of a U.S. private placement under U.S. law.”

It was the DealBook article published late on Jan. 2, reporting that Goldman had invested $450 million in Facebook and would create a special-purpose investment vehicle for clients, that appeared to trigger the regulator scrutiny, according to Goldman. “The transaction generated intense media attention following the publication of an article on the evening of January 2, 2011, shortly after the launch of the transaction,” the firm said.

Goldman added in its statement: “The decision not to proceed in the U.S. was based on the sole judgment of Goldman Sachs and was not required or requested by any other party.”

Foreign investors are not subject to the same S.E.C. rules.

It is unclear how much money Goldman Sachs will ultimately raise for Facebook. In a private memorandum to clients when it pitched the offering, it said it planned to raise as much as $1.5 billion.

While the offering was oversubscribed — perhaps by as much as three times — with American clients now not eligible to participate, it is not clear whether Goldman or Facebook will lower the size of the offering. A majority of Goldman’s high-net-worth clients are based in the United States.

The failed offering may also deal a blow to Goldman’s relationship to Facebook and the firm’s prospects of leading the social network’s long-awaited initial public offering, expected in 2012.

Goldman was brought in as a Facebook investor through its relationship with DST, a Russian investment firm that is a major Facebook shareholder and has invested in several other popular Internet companies, like the social-buying site Groupon.

However, in the past two weeks, the relationship between Facebook and Goldman has grown increasingly tense, people involved in the offering said. Accusations about the news leaking about the offering has flown back and forth, these people said.

Within days of the news breaking about the offering, the S.E.C. began an inquiry into the deal, looking both at the media reports and the structure of the transaction. The deal itself was considered controversial because the S.E.C. requires companies to publicly disclose their financial results if they have more than 499 investors.

The “special purpose vehicle” that Goldman had created for Facebook would have allowed it to remain under that threshold even though hundreds of Goldman’s clients would have been shareholders.

The full Goldman statement provided to DealBook is below:

    Goldman Sachs originally intended to conduct a private placement in the U.S. and offshore to investors interested in Facebook. The transaction generated intense media attention following the publication of an article on the evening of January 2, 2011, shortly after the launch of the transaction. In light of this intense media coverage, Goldman Sachs has decided to proceed only with the offer to investors outside the U.S.

    Goldman Sachs concluded that the level of media attention might not be consistent with the proper completion of a U.S. private placement under U.S. law. The decision not to proceed in the U.S. was based on the sole judgment of Goldman Sachs and was not required or requested by any other party. We regret the consequences of this decision, but Goldman Sachs believes this is the most prudent path to take.