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Posted at 3:26 PM ET, 01/ 6/2011

Facebook's rule-bending

By Ezra Klein

Justin Fox has a good post on why Facebook doesn't want to go public and whether that tells us something "interesting and disturbing about the current state of public financial markets." And it probably does. But it also tells us something interesting and disturbing about Facebook.

The way they've structured the deal with Goldman Sachs is that Goldman will gather together many investors in one vehicle. That way, the company, which will have many more than 500 people owning shares, will not technically have 500 people owning shares, and thus won't be regulated as a public company. In other words, Facebook wants the benefits of going public without the various burdens.

It's hard not to see this in terms of some of the company's more ruthless moves, like wiping out different layers of default privacy protections in ways that most users were never going to understand but could've been actively harmed by. That's not breaking any rules, exactly, but it's bending them pretty aggressively. So too with this effort, which is, somewhat ironically, an attempt to keep the company's internal figures private.

History is littered with companies that were aggressive in service of growth and profits. You can't really fault Facebook for that. But Facebook is a bit of an odd company, in that its business model essentially boils down to "trust us with your online life, and many of the details of your offline life." And I can't think of anything Facebook has done in recent years that has given me cause to trust it more, rather than less.

By Ezra Klein  | January 6, 2011; 3:26 PM ET
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The GS investment in FB is hardly unique. Lots of venture capital and other investment in private companies is structured this way (from reports, the GS investment pool is invested in other things and GS has control over the investments; it's not just a pure indirect investment in FB). FB is just getting a lot of attention because of its prominence.

Posted by: fuse | January 6, 2011 3:38 PM | Report abuse

"In other words, Facebook wants the benefits of going public without the various burdens."

I'm not sure if Facebook wants the "benefits" of going public as much as not being forced to go public just to get additional investment.

Posted by: jnc4p | January 6, 2011 3:55 PM | Report abuse

And you thus endorse the repeal of Section 404 of Sarbanes - Oxley?

Posted by: cdosquared5 | January 6, 2011 5:27 PM | Report abuse

Well, Ezra -- you know all those additional rules and regulations you are consistently in favor of adding? The thousands of new pages of SEC requirements? Remember Sarb-Ox?

Do you think that heaping all that new stuff on public companies would ever, you know, DISCOURAGE COMPANIES FROM GOING PUBLIC?

Ezra will just never admit that policies that sound good in the PR soundbite may actually have bad consequences.

Posted by: enoriverbend | January 6, 2011 5:41 PM | Report abuse

I also don't see what is going to hold back the other smaller investors (like the employees) in Facebook from doing the same thing Goldman did, but to the general public - as in set up an ETF, SPRD, etc.

Actually I am making the prediction that we will see a lot more of of the above in the future.


Posted by: chrisgaun | January 6, 2011 7:25 PM | Report abuse

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