Should Facebook be Forced to go Public?

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Zuckerberg and famed private market investor John Doerr (left) (Hector Amezcua/REUTERS)

UPATED 3:34 PM

Much of the analysis of the debacle that has become of Facebook’s $2 billion private offering is this: Goldman royally messed up. The latest sign came on Monday when the investment bank, which is leading the Facebook deal, decided to bar its US clients from the offering. That move has been seen as an admission from Goldman that it screwed up, and a black eye for the white shoe reputation of the firm. Mark Zuckerberg & Co. are reportedly mad at Goldman for making the details of the deal so public. The investment bank’s most prized US clients are surely mad that they will now not get early and privileged access–that is after all the point of being a prized Goldman client–to Facebook shares. And the Securities and Exchange Commission is still reportedly looking into whether the deal violates its rule that private companies must have fewer than 500 investors.

But are the wrong people being punished for the troubled Goldman-Facebook deal? Not that anyone really needs to stand up for Goldman’s high-net worth clients, but are they really the ones that should be penalized? Goldman looks bad, but it still gets to make it’s $450 million investment into Facebook. And Facebook still walks away with $2 billion in cash and a deal that values the company at $50 billion.

The truth is Goldman has a lot less to apologize for than people think, and Facebook deserves a lot more blame. The deal was a lousy one from the start. Goldman’s biggest mistake was taking it. The deal highlights the failings of the emerging public market for private shares, and why companies like Facebook shouldn’t be allowed to play in that market. As a result, the best fix for the Goldman-Facebook debacle is not making the offering even more exclusive by barring the few US investors who were allowed to buy shares in the deal, but instead allowing all US investors the chance to buy into one of the fastest growing firms in the economy. Facebook should be forced to go public. The SEC has the ability to do that, and that’s what it should do. Here’s why:Goldman has been criticized for publicizing the deal more than it should have. Indeed, the morning after the deal was set, the news was leaked to the New York Times, that a deal was in the works that would value Facebook at $50 billion. Private deals are not supposed to be advertised or publicized and so that’s why Goldman looks to be in hot water. But that’ not really Goldman’s fault. Publicity was exactly what Facebook’s CEO Zuckerberg wanted out of the deal.

Zuckerberg was trying to use the private market to tell customers, vendors and competitors that his company was now worth $50 billion. But that’s what initial public offerings are for. The story line, at the time when the news of the private deal hit, was that Zuckerberg didn’t want to go public. Yet, just a few days later, it was reported that Zuckerberg was OK with Facebook going public in 2012. The truth may be that Facebook CEO Zuckerberg, or his advisors, knew it was much easier to manipulate private markets and ensure that they would get their $50 billion valuation. So that’s what they did:

The biggest issue is one of self dealing and how easy it seems to potentially manipulate the market for private shares. Consider the Facebook-Goldman deal. In December, some Facebook private shares traded on SharesPost, one of these markets for non-public stocks, for a price that gave the Facebook a value of $56 billion. Yet, other shares traded for considerably less. Market’s like SharePost are illiquid and prices are hard to believe. But Mark Zuckerberg liked the sound of $50 billion. So he called Goldman and asked if they could find investors who wanted to make a significant purchase of Facebook shares that would value the company at $50 billion. Who did Goldman find? Itself and a Russian technology investment firm Digital Sky Technologies, at least initially. It also opened a fund to invest in Facebook, but that was only after it let word get out that it and DST were investing $450 million into the social networking company.

In the wake of the financial crisis, the SEC is trying to fix financial markets so they can’t be so easily rigged. In the case of the housing boom, Wall Street firms used derivatives like collateralized debt obligations (CDO) and credit default swaps (CDS) to inflate the prices for what turned out to be worthless mortgage loans. These days Wall Street is trying to use private offerings to do the same for shares of social networking and other start-up firms. The SEC has the authority to make Facebook immediately go public. The SEC gave Facebook a waiver last year allowing it to remain private despite it being clear that it would soon violate the 500 investor rule. If the SEC revoked that waiver, it would be clear sign that the regulatory agency is serious that the days of “business as usual” on Wall Street will no longer be tolerated.

CORRECTION: In an earlier version of this story, the caption suggested that venture capitalist John Doerr, who has invested in a many private companies, is an investor in Facebook. He is not.

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