Facebook’s Current Private Placement
Facebook Sets Stage for IPO Next Year
Facebook Inc., one of the world’s hottest technology companies, gave the clearest sign yet that it is preparing to take itself public sometime next year, as it revealed new details in a 100-page document sent to a select group of potential investors.
Facebook, of Palo Alto, Calif., said it plans to increase its number of shareholders above 500 this year, according to the private-placement document, forcing the social-networking company to begin disclosing reams of financial information or go public by April 2012.
Facebook Chief Executive Mark Zuckerberg has said he is in no rush to go public, but those intentions have been hotly contested since the company launched an equity offering of as much as $1.5 billion through Goldman Sachs Group Inc. earlier this week.
Frenzied investor interest in the deal, offered solely to Goldman partners and handpicked clients of the securities firm, has put a stamp of approval on the $50 billion valuation of Facebook implied by its agreement with Goldman and Digital Sky Technologies for a $500 million infusion from the two companies.
The strong demand and sharp increase in Facebook’s value from $10 billion in mid-2009 give Mr. Zuckerberg, other Facebook executives and its relatively small circle of investors a potentially irresistible incentive to take the fast-growing company public despite the downside of doing so. As a private company, Facebook isn’t required to report its revenue, profits or losses, and executive compensation, as publicly traded companies must do.
A Facebook spokesman declined to comment. Goldman declined to comment.
The social-networking company had fewer than 500 investors as of the end of last year, said a person familiar with the company, including current and former employees, venture-capital firms and private investors. In 2008, Facebook told the Securities and Exchange Commission that the company had fewer than 499 holders in each of five classes of stock.
The number of investors is crucial because of the SEC’s 47-year-old rules governing private companies. The rules require firms with 500 or more shareholders of record in a given type of stock to publicly disclose certain financial information. The requirement is designed to protect investors from unduly risking their money.
Crossing the threshold triggers the SEC’s filing requirements, even if a company’s shares don’t trade publicly. Such companies must register as a reporting company within 120 days after the end of year in which the limit is breached. At that point, companies typically conclude that they might as well go public, listing their shares on an exchange and cashing in if the offering succeeds.
Facebook’s current fiscal year ends on Dec. 31, making its disclosure deadline the end of April 2012. People familiar with the matter have said Facebook sought a benchmark valuation from a leading investment bank in preparation for a potential initial public offering next year and was keen on a “round-number” valuation of $50 billion.
The investment world has been so eager for a Facebook IPO, it has spurred active trading in shares of Facebook’s still-private stock in secondary markets.
The 100-page document that includes the potential timetable for a Facebook public offering is being circulated to would-be investors in the $1.5 billion “special-purpose vehicle” created by Goldman.
Goldman sent copies of the private-placement memo throughout the day Thursday, often by messenger instead of email to prevent leaks. In some cases, even spouses of the document’s recipients were asked to sign a confidentiality agreement.
The document contains much more financial information about Facebook than previously known outside the company. For example, in the first nine months of 2010, Facebook had net income of $355 million on revenue of about $1.2 billion, said one person who reviewed the results.
Fourth-quarter results weren’t disclosed to potential investors, but one person familiar with the company said Facebook likely had 2010 revenue of $1.9 billion to $2 billion. Analysts have said the company’s revenue last year could be as high as $2 billion, fueled by advertising growth.
Because of huge demand to get a piece of Facebook, Goldman had planned to close the deal as soon as Thursday, according to people familiar with the situation. But a deadline hasn’t been officially set. Clients of the firm still were clamoring to get into the private offering as of late Thursday, these people said.
The Facebook deal is “very reminiscent of the Internet bubble,” says one Goldman client who received information about the offering but planned to spend little time reviewing it, partly because the deal is being assembled so fast. Still, he was leaning toward buying Facebook shares. “You’d like to be part of it,” he says.
Other technology firms and investment banks are racing to raise capital and hatch potential IPOs because of the sky-high valuation Facebook is establishing with its private share offering and infusion from Goldman and DST.
It isn’t clear why Facebook decided to tell potential investors that it intends to breach the 500-shareholder limit. But executives have been uncomfortable about the secondary market that has sprung up to buy shares from current and former Facebook employees because such sales have led to inconsistent valuations of the company that are based on small numbers of shares changing hands.
The investment vehicle being created by Goldman is intended to pool investors’ money to create the legal effect of a single new shareholder in Facebook, since each special-purpose vehicle counts as one shareholder of record.
Companies may exceed that limit during their financial year but still avoid reporting requirements, as long as the total declines to 499 or fewer at the end of the company’s fiscal year.
Source: WSJ online
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