Thursday, January 06, 2011

Meet the ‘New Normal,’ Same as the Old Normal! Goldman Invents the Non Public-IPO

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.


S said...

So we should expect the SEC to try again to prove P=NP?

Hubert said...

do you think GS had any hint from the SEC that it would go along with that or do you think they just do it in-the-face ? How do you think the SEC is going to react ?

Jeff Matthews said...

First, it's a Facebook issuance of equity(or equity-equivalent or whatever you want to call it), so presumably FB talked to the SEC about it.
Second, FB has gotten an exemption in the past from the SEC, so it wouldn't be the first time they've gotten around the registration issue.
Third, as for GS, who knows what the SEC thinks vis a vis Goldman's role in pitching this deal...But speaking purely as an outside observer, if the SEC lets this happen, then, it seems to me, Katy-bar-the-door: Goldman has figured out a way to bypass the role of the SEC in the capital formation process.

The next logical step is a Goldman trading desk for Goldman deals...A Goldman Fixed Commission Rate for Goldman deals...A Goldman Securities Exchange Commission for Goldman deals...

The mind reels...


Doug said...

I'm guessing GS had to send that offer out by snail mail as no self respecting spam filter would have allowed that text to pass through!

Alain said...

The Goldman Sachs letter could be mistaken for a Nigerian Scam letter.

Anonymous said...

Doesn't Goldman remind you of the scorpion in the old joke about the scorpion and the frog?

Anonymous said...

From QSR Magazine (one of many):
Me thinks the lid is about to blow off the Dairy Queen corporate boiling pot of mistrust and lies. This time, suits filed by regional operators organizations will force Warren Buffet and Berkshire Hathaway to look more deeply into the misdeeds that have constructed the house of cards in the franchise system. Yeah, it was all fun and games when they thought new ownership and investment by WB and BH would force transparency in management to support increasing profit margins and revenue growth. This logic is flawed right off the bat as all INDQ management has done is bullied their base of franchisees through illegal changes to legacy contracts and has begun to force many smaller operators out of the system. Since when is it cool for a national brand to step on the throats of the very franchisees who generate their revenue (a scam), promote their brand, and operate profitable businesses. INDQ just wants more to show Warren Buffet that his investment would grow and he could look like the hero in front of his shareholders. Little does he know the magnitude of the clamp he has begun to tighten on the nads of the mom and pop operators. We will see what they have to say on April 30th in Omaha when the clown suits come out and the signs start flashing the incriminating facts against them. While I am not too naive to think that one little Guy can communicate the fullness of inept management and illegal practices, but I damned well know that MSNBC, CBS Business Watch, and all the other business magazine will want to know our collective story. Mine is a single-focused witch hunt based on innuendo and rumor all for the sake of bringing me down. When it gets to the national stage, we'll see who listens then. Continue to turn your back on me and the rest of us because one day you'll be forced to look into the light and come to terms with your poor and unjust business practices.

More information on these blogs below - right here on QSR Magazine

INDQ Puts Operator on COD - Say What?

Dairy Queen Continues to Hammer the Small Guy - How's that Fair?

Are Mascots Outdated?