Facebook Deal Sparks Broad SEC Probe

Goldman Sachs’ deal with Facebook might bring the SEC down on all manner of privately held stock purchases. The regulatory body has begun an investigation to see whether it needs to rewrite disclosure rules for privately held firms, and the very line dividing public and private firms, sources tell the Wall Street Journal. They’ll also look into the Facebook deal, and others like it, to see if they’re designed to skirt the 500-shareholder rule.

Private companies are allowed a maximum of 500 shareholders. But the Goldman deal gets around that by creating a “special purpose vehicle” that acts like a single investor, but which many Goldman clients can buy into. “These hybrid companies … are betwixt and between: not quite private and not quite public,” said a former California commissioner of corporations. “They have these shares being traded, but not the same disclosure requirements as a public company.” (More Goldman Sachs stories.)