In my finance class, the teacher mentioned Facebook and it's new money-raising venture with Goldman. He wants us to first describe what the basic rules of ownership for privately-held companies are and what they are intended to do, and then he wants us to formulate an argument based off of this question:
Does the Facebook case demonstrate that we need to change one or more of the regulations that apply to corporate governance?
So basically, should the loophole the Goldman used to raise money for Facebook be closed off through regulations or should the regulations remain unchanged?
I figured I would let some people on here throw their ideas and opinions around since this is an interesting topic.
First, begin by defining the loophole (don't seen one) ... then read the story about i2 technologies and how the valuation worked ($30B), turned out (stock went from $200 then to $.40), and who came out on top (CEO). I know you will read the story, it's a good one. And I know that you will see that no one cares about private companies as much as public ones. Or at least I don't.
The loophole is the fact that a private firm with over 500 shareholders has to report to the SEC its financials. Goldman is bypassing it by creating one entity that will own shares, and then selling shares in that entity to the investors.
And to answer the original question (and this is right, regardless of if your professor disagrees) is that the rule should remain unchanged, not because of Facebook, but because of the implications to other companies. While it is unlikely that there are many companies out there with more than 500 shareholders once shell company holders are taken into account, there are probably a few (I know I worked on one company that must have had something like 300 shareholders, and its market cap was only $15M). The last thing the SEC (and society) needs is more useless paperwork coming from a bunch of small companies; costing them time and small business owners money. There are regulations that limit who can invest in private companies, and plenty of securities regulations. These are usually accredited investors and if some millionaire wants to blow some of him money on FB, more power to him; we as a society shouldn't care.
What is your response to only being able to invest in Facebook (or other possible high growth companies) if you are a friend/high-wealth client of Goldman?
just to clarify...if the entity owns the shares and the investors own the entity...who gets the owners voting rights associated with owning the shares
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