Facebook's Raw Deal
A lot recently has been written about the role of Goldman Sachs in the distribution of Facebook shares and how the distribution had to be restructured as an off-shore exempt transaction under Regulation S in order to minimize the risk of SEC action. Much less has been written about the raw deal that this implies for Facebook and other high profile issuers. It is those issuers, far more so than Goldman Sachs, that could be impacted.
As described in media coverage, Facebook attempted to do exactly what many companies do every year — a private placement of its securities to accredited investors. Following long-established and well-accepted practices, Facebook retained Goldman Sachs, and Goldman Sachs, as the placement agent, contacted potential purchasers. Respecting the safe harbor requirements of Regulation D, as well as the requirements of the statutory predecessor to Regulation D, a “Section 4(2)” private placement, each potential investor had a preexisting relationship with Facebook or Goldman Sachs and was obligated to sign a confidentiality agreement. Through these limitations, the distribution was designed so that it would not run afoul of the “general solicitation” prohibitions under both Regulation D and Section 4(2).
But here is where the process broke down. Due to no apparent fault of either Facebook or Goldman Sachs, someone leaked the existence of the offering, and a media frenzy followed. Concerned about the availability of the Regulation D and Section 4(2) exemptions in this context, Facebook and Goldman Sachs were left with no alternative but to retreat to the Regulation S safe harbor for foreign offerings, which does not include a prohibition against general solicitations.
This is an unfortunate outcome. It implies that issuers may be at risk for a “blown” private placement — which has broad implications under the Securities Act — even though they diligently followed the requirements of Regulation D and well-accepted private placement practices. This could be particularly worrisome for high profile pre-IPO issuers where leaks are almost certain to occur. But it also has broader implications, for instance in the context of Rule 144A offerings, which are reliant upon Regulation D or Section 4(2) as well. Should an issuer be ineligible for private placements in the U.S. simply because a leak is possible or, in the case of an issuer such as Facebook, a near certainty? Also, should U.S. investors be deprived of the opportunity to invest in a promising private placement in favor of foreign investors, simply because of a third-party’s violation of a confidentiality agreement and the overblown impact of bloggers and the insatiable need of hyper-competitive media outlets to “one up” one another in an attempt to “break” a story?
The underlying premise of Regulation D is that if issuers attempt in good faith to comply, technicalities should not undermine its availability. For instance, issuers need merely “reasonably believe” that an investor is an “accredited investor,” and should that belief prove to be erroneous, no damage is done to the availability of the safe harbor. The general solicitation concept contained in Regulation D should be similarly applied, and companies, including Facebook, should not have any reluctance to rely upon the safe harbor in the future simply because of the unfortunate actions of others.