The New York Times | January 17, 2011
By Andrew Ross Sorkin

Just more than a week after Goldman Sachs offered its most prized clients a chance to invest in Facebook, the firm on Monday withdrew the opportunity from clients in the United States because of worries that the deal could run afoul of securities regulations.

The decision is a considered a serious embarrassment for Goldman, which had marketed the investment to its wealthiest clients, including corporate magnates and directors of the nation’s largest companies.

The offering was supposed to have been a triumph for the firm, which is trying to move past run-ins with regulators, including a $550 million settlement with the Securities and Exchange Commission last summer over a complex mortgage investment. But the Facebook plan is now likely to raise new questions about whether Goldman tried to push regulatory boundaries once again.

Goldman made its decision after the investment plan drew scrutiny. The S.E.C. had opened an inquiry into the structure of the offering and whether it violated the law because of widespread news coverage. Federal and state regulations prohibit what is known as “general solicitation and advertising” in private offerings. Firms like Goldman seeking to raise money cannot take action that resembles public promotion of the offering, like buying ads or communicating with news outlets.

In a statement on Monday, the firm said: “In light of this intense media coverage, Goldman Sachs has decided to proceed only with the offer to investors outside the U.S. Goldman Sachs concluded that the level of media attention might not be consistent with the proper completion of a U.S. private placement under U.S. law.”

A report by The New York Times, published late on Jan. 2, that Goldman had invested $450 million in Facebook and would create a special-purpose investment vehicle for clients, citing people involved in the deal, appeared to prompt the regulatory scrutiny. “The transaction generated intense media attention following the publication of an article on the evening of January 2, 2011, shortly after the launch of the transaction,” the firm said in its statement Monday.

Goldman had not been planning to initiate the offering that night, but it sped up the process after The Times called the firm seeking comment, according to an executive who spoke on the condition of anonymity because he was not authorized to speak.

That night, a Goldman spokesman declined to comment. Late that night, before the report was published, executives in Goldman’s private wealth-management unit e-mailed their clients about the offering, people who received the e-mail said.

Goldman added in its statement on Monday that the decision was made on its own and “was not required or requested by any other party.”

Foreign investors will still be able to participate in the Goldman offering because they are not subject to the S.E.C. rules on solicitation in private offerings. However, all partners of Goldman, whether based in the United States or abroad, will not be allowed to invest, according to people briefed on the matter.

It is unclear how much money Goldman will raise for Facebook. In a private memorandum to clients when it made the offering, it said it planned to raise as much as $1.5 billion. The minimum investment is $2 million. The overall deal pegged Facebook’s value at $50 billion.

While the offering was oversubscribed — perhaps by as much as three times — with American clients now ineligible to participate, it is not clear whether Goldman or Facebook will lower the size of the offering. A majority of Goldman’s high-net-worth clients are based in the United States, and these investors may be upset over being denied a potentially lucrative opportunity afforded to investors in Europe and Asia.

For Goldman executives who manage money for wealthy families, so-called special investments have long been a major selling point in luring clients to the firm. The argument to prospective clients is that by placing their money with Goldman, they have access to the same investment opportunities as the firm, long considered one of the world’s smartest investors.

The struggles of the offering may also deal a blow to Goldman’s relationship with Facebook and to the firm’s prospects of leading the social network’s long-awaited initial public offering, expected in 2012.

Over the last two weeks, the companies’ relationship has grown increasingly tense, people involved in the offering said. Accusations about the news leak have flown back and forth, these people said.

Goldman was brought in as a Facebook investor through its relationship with DST, a Russian investment firm led by Yuri Milner, which is a major Facebook shareholder and has invested in several other popular Internet companies, like Groupon.

Within days of the news breaking about the offering, the S.E.C. began an inquiry, looking both at the news reports and the structure of the transaction.

The deal itself was considered controversial because the S.E.C. requires companies to publicly disclose their financial results if they have more than 499 investors. But Facebook’s plans, according to a Goldman offering memorandum, were to go public by April 2012, following the timeline set by the rule.

Investors and analysts are likely to ask Goldman executives about the offering’s troubles when the firm reports earnings on Wednesday.

William Sjostrom, a securities law professor at the University of Arizona who has written about private placements, said he was not surprised by Goldman’s move given how early news of the offering broke and the volume of publicity.

“Goldman probably looked at the deal and figured it could complete the offering outside the U.S. anyway,” Mr. Sjostrom said. “The firm’s U.S. clients are probably frustrated that they now can’t participate, but that’s preferable than having a potential problem with regulators.”

The full Goldman statement provided to DealBook is below:

Goldman Sachs originally intended to conduct a private placement in the U.S. and offshore to investors interested in Facebook. The transaction generated intense media attention following the publication of an article on the evening of January 2, 2011, shortly after the launch of the transaction. In light of this intense media coverage, Goldman Sachs has decided to proceed only with the offer to investors outside the U.S. 

Goldman Sachs concluded that the level of media attention might not be consistent with the proper completion of a U.S. private placement under U.S. law. The decision not to proceed in the U.S. was based on the sole judgment of Goldman Sachs and was not required or requested by any other party. We regret the consequences of this decision, but Goldman Sachs believes this is the most prudent path to take.