So much has been written, so much will be said, about Goldman Sachs’s $450 million investment in Facebook and the many questions it has raised.  Thankfully, Steven Davidoff - Deal Professor for NYT Dealbook - gives his guide to understanding the legal issues raised by the deal. 

    499 Bottles of Beer Holders on the Wall.   Goldman has been oversubscribed by clients who want to buy into a special investment vehicle (SIV) that will hold and own - effectively, on behalf of the clients - Facebook shares that presently are worth $1.5 billion. 

Will this share issuance push Facebook over 499 shareholders?  Under federal securities laws - Section 12(g) of the '34 Exchange Act - a company is required to begin reporting to the SEC, filing quarterly and annual reports, among other items, once it has more than 499 shareholders of record. This doesn't mean it needs to do an IPO, just commence these filings.  The requirement to begin reporting is effective 120 days after the end of the fiscal year a company exceeded this amount.  So, if Facebook goes over the amount this year, they would be required to start reporting to the SEC in May of 2012.

There was some speculation that Facebook was going to take the position that since the shares are held through a single vehicle, they count as only one shareholder and so the threshold is not exceeded. As I wrote on Monday when I discussed this more fully, it is unlikely that the S.E.C. would buy into this claim. It now appears that Facebook and Goldman agree, as it is being reported that Facebook has indicated that it will begin reporting to the S.E.C. by April 2012.

So, why a single investment vehicle? Probably to make the offering easier for Facebook. It only has to deal with one shareholder – Goldman – instead of hundreds of needy Goldman clients. In addition, a single vehicle ensures that none of these Goldman clients sell their shares early or before Facebook wants them to, and allows Goldman to better coordinate this investment and these controls. The investment vehicle structure has the additional benefit of making it easier for Goldman to take its 5 percent cut of any profit. Goldman can simply withhold this amount after the shares are sold or distributed to its clients.

    Offering Violation.   The securities law issue here rests on whether there is a “general solicitation” such that this becomes a “public offering.”  The federal securities laws strictly regulate any offering of shares.  A company or underwriter like Goldman must find an exemption or otherwise register the securities with the SEC.  The Facebook shares are not being registered, so Facebook and Goldman are relying on an exemption.

In this case, the exemptions are for the share issuance to the Goldman vehicle and for the issuance of securities in the Goldman vehicle to the investors.  In the latter case, it is likely that Goldman’s clients are simply purchasing shares, or other interests, in the vehicle holding the Facebook shares.  This second issuance also needs an exemption since again all issuances of securities need to be registered or have an exemption.

For the complete commentary, go to:  [NYT Dealbook, 1/10, "Davidoff's "The Legal Issues ..."]