Private Facebook offering too rich for most anyway

  • Article by: PAUL SULLIVAN , New York Times
  • Updated: January 16, 2011 - 2:33 PM

Private share offerings occur every week in the United States. By one estimate, they are nearly as common as public security sales.

But the recent news that Goldman Sachs would sell private shares in Facebook, the world's largest social networking site and a private company, was met with some criticism that the offering was only open to the richest of the rich.

Yet that is the audience for all these private offerings. In reality, they are the only people who could -- and should -- invest in such high-risk private deals. Sure, the deals might offer phenomenal returns, but they might also be worthless. Only the wealthy can absorb that level of loss.

The private offerings "are often narrow or targeted investments," said David Bailin, global head of managed investments at Citi Private Bank. "It's a highly concentrated investment, probably not that liquid, but it's how it's designed."

Both advisers and academics said the bigger issue with private placements was being overlooked in the hoopla over Goldman and Facebook -- that private placements are not intended to be liquid. Investors expecting liquidity could face unexpected losses.

Private placements have various uses and names. They are not required to have extensive disclosures, although many have prospectuses that rival public offerings in detail. But the allure is always the same: access to something that could offer high returns in exchange for high risk.

John Coffee Jr., a professor at Columbia University Law School and director of its Center on Corporate Governance, said Facebook and Goldman ''gave investors a 100-page memorandum, which they're not obligated to do."

What's the allure of the deal, since the profitability has been roundly questioned?

Meir Statman, professor of finance at Santa Clara University, said people willing to invest in the Facebook offering were being lured by "attraction status." He said investing in an offering with such a $2 million minimum investment signaled that the investor was wealthy.

Private placements are not for every investor. To be considered an "accredited investor" by the Securities and Exchange Commission, a person either has to have a net worth of $1 million or an annual income in excess of $200,000 ($300,000 for couples) over the past two years.

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