In “Meet the ‘New Normal,’ Same as the Old Normal” (April 9, 2010), we described a recent spate of earnings announcements from retailers across America as being surprisingly reminiscent of every other economic recovery we ever recalled.
'Surprising,' that is, to those too busy proclaiming the death of the “Old Normal” and the rise of the so-called “New Normal”—a new American era of dashed expectations, vanished hopes, reduced living standards, “Two and a Half Men” reruns in perpetuity, and just generally the decline and fall everything we once held dear—to notice that things were, in fact, improving.
And although it took a few more months than we expected to see the “Old Normal” begin returning in earnest, yesterday’s ADP payroll data made clear the “New Normal” is, in fact, looking pretty much like the ‘Old Normal.’
Today we are happy to report one more sign that the “New Normal” looks a lot like the “Old Normal”: Goldman Sachs is back, center stage, in all its canny rule-avoiding supremeness.
How else to describe the Goldman-managed, Goldman-led, Goldman-directed Non-Public Initial Public Offering (what we will abbreviate as 'NP-IPO') of Facebook—in what surely must be the hottest Initial Public Offering since the very public Initial Public Offering of Netscape 15 years ago?
The rules being avoided here are those set by the Securities Exchange Act of 1934, since amended by SEC rules, that a company with more than $10 million in assets and 500 shareholders ought to register its shares with the SEC, and file quarterly and annual financials.
Goldman, for the record—according to the Wall Street Journal—is selling what is believed to be $1.5 billion worth of Facebook shares to a bunch of Goldman clients for a minimum investment of $2 million a person.
And the deal is, in the parlance of IPOs since time immemorial, oversubscribed.
So how is Goldman getting around the $10 million asset/500 shareholder hurdle, since, after all, Facebook certainly has more than $10 million in assets and, even before the Goldman Non-Public IPO, more than 500 shareholders?
By calling it a private investment and pitching it only to wealthy individuals, that's how.
Here’s how the Journal described Goldman’s sales pitch for the hottest shares on the planet:
Some investors approached by Goldman initially got a 400-word email, offering them a chance to "discuss a highly confidential and time sensitive investment opportunity in a private company that is considering a transaction to raise additional capital."
We’ve heard from our own sources—non-Goldman people—that this is how the Goldman pitch did in fact go down, and that while Facebook wasn’t actually identified in the initial contact, everybody who got contacted seemed to know that Goldman was handling a Non-Public IPO of Facebook anyway, or would when the news broke the next day, so the cloak-and-dagger stuff was for naught.
The Goldman email itself is a doozy—at least, as it has been reported by the Wall Street Journal—and reads as follows:
"When you have a chance I wanted to find a time to discuss a highly confidential and time sensitive investment opportunity in a private company that is considering a transaction to raise additional capital.
For confidentiality reasons, I am unable to tell you the name of the company unless you agree not to use such information other than in connection with your evaluation of the investment opportunity and to keep all information that we reveal to you strictly confidential. All I can tell you is that it is a private company, but that its stock trades in a limited manner on certain private markets. If you are a participant in trading on private markets, you may wish to decline receiving information about this opportunity because of the restrictions that will be imposed on you, which I will now describe.
If you agree not to use information that we reveal to you (including the name of the company and that the company is considering a transaction) other than in connection with your evaluation of the investment opportunity and to keep all such information strictly confidential until the information has become public, I will be able to disclose the name of the company and provide you with more information about the company and the investment opportunity.
In addition, certain information we will reveal to you about the investment opportunity and the related transaction will constitute material nonpublic information about this private company. US federal securities laws impose restrictions on certain securities trading on the basis of material nonpublic information. You must agree that if we disclose to you information regarding the company, the investment opportunity and the related transaction, you will not purchase or sell the company's securities until the earlier of (i) the date when all of the information either has been publicly disclosed or is no longer material and (ii) 6 months after the date on which we provide you the information. However, even after such 6 month period has elapsed, trading in the company's securities will remain subject to federal securities laws and you will need to determine at the time of any transaction, in consultation with your advisors and based upon the prevailing facts and circumstances, whether purchasing or selling the company's securities would be in compliance with such laws.
If you agree to these restrictions either by responding to this email or verbally on any subsequent telephone conversation that we have, I will send you an email confirming your agreement to be subject to these restrictions and, on that basis, will provide you with a summary of the investment opportunity.”
—The Wall Street Journal, January 6, 2011
And so it is that Goldman Sachs, which for one, brief, shining moment was dressed-down in the chambers of Congress for selling the deliberately-packaged, shoddy merchandise of one client to yet another client that was selling the same merchandise short, is already back in action, at the top of its game.
Having wormed its way inside the most popular web site in the world and pried away shares in the most highly valued (relative to sales and earnings) large company in the Free World, it is now offering those shares along with “material nonpublic information” on a take-it-or-leave-it basis to its own most exclusive clients.
No slackers, no Congresspersons, no non-Goldman clients need apply.
“Well what,” you may ask, “is wrong with that?”
Technically, of course, very likely nothing.
But during the heady dot-com Bubble days of the late 1990s, when Silicon Valley companies were routinely distributing millions of shares worth of stock options to employees without being required to expense, for reporting purposes, the expected value of those options—thus inflating the valuation of those companies and the likely cost of those stock options while simultaneously damaging the value accruing to those companies' public shareholders, Warren Buffett asked, rhetorically and correctly, “If the value of the options is not an expense, what is it?”
And if Goldman Sachs’ offering—of what apparently amounts to millions of shares of Facebook worth more than a billion dollars, to hundreds, if not thousands, of outsiders not affiliated with that company—is not an “Initial Public Offering,” what is it?
Why, it's a Non-Public Initial Public Offering!
Goldman end-running the Securities Exchange Act of 1934?
Meet the New Normal, same as the Old Normal!
Jeff Matthews
I Am Not Making This Up
© 2011 NotMakingThisUp, LLC
The content contained in this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.
