Where’s the market transparency in the SEC’s vision of private offerings? Once again, only the wealthiest among us will have access to the best investing opportunities.
All that glitters is apparently not Goldman.
The firm set up a private marketplace in 2007, “open only to institutions and ultrarich investors,” according to the Wall Street Journal. Its purpose was to permit companies to offer shares directly to buyers, without going through the cost, headache, and public disclosure required of offerings in the public markets. While initial results looked quite promising — Oaktree Capital Management sold a 15% stake in this private venue, raising about $1 billion — it quickly and mysteriously dried up. The Journal reports that “fewer than seven Apollo trades took place last year,” referring to Apollo Management, another early launcher in the private exchange which has since abandoned Goldman for the Big Board.
If you find the Journal’s language oddly imprecise — “fewer than seven trades” – note that Goldman counts each individual buyer in a single block as a separate trade. We suspect that the sellers may be arguing with that definition, which is presumably one measure of performance in this new exchange. Fees are not disclosed, but we speculate that Goldman is making a bigger piece of change, for less work, than it would if it were running a public offering. Goldman (GS) can get paid piecemeal on any transaction and is not held to a firm commitment cash raise — a standard investment banking structure in which the underwriter guarantees a minimum amount to the client company and must make up any shortfall out of its own coffers.
Goldman says the idea worked, because it permitted private companies to sell shares and still remain private. We assume it was not a big money maker for the banking firm, because Goldman appears not to be competing for trades with other private venues where shares of Facebook, LinkedIn and Twitter are changing hands.
At the same time, the SEC is considering loosening the restrictions on private offerings. New facilities would include an increase in the number of shareholders a company may have and still be deemed private (currently 499), as well as permission to advertise private offerings.
The stated public policy objective of this move would be to keep up with changing markets and respond to the increased demand for private investment — the Journal says the volume of private share purchases went from $2.4 billion in 2009 to $4.6 billion last year. The unstated, but clearly well-understood, objective would be to undermine the role of the exchanges in stock offerings. Bankers would be driven to offer private financings as a viable option for their corporate finance clients — this would presumably be good for the major investment banks, as it opens the playing field where the richest transactions stand to be completed — and it would be good for the client companies.
It’s clearly bad for market transparency, but the SEC apparently has other fish to fry. It is not bad enough that private investors are routinely crushed when they try to trade stocks on the regulated exchanges. This new facility would remove a significant capitalist opportunity from the hands of the average investor — America’s middle class — and shove it back into the maw of the wealthiest few.
We recall that Goldman abruptly cancelled all domestic transactions in its private purchase of Facebook shares. In the interest of fairness it also prohibited all of its own partners from participating. This was because Goldman’s legal team believed the profile of the deal had risen to the level of public knowledge, and they feared this would be construed as a violation of the ban on solicitation of private offerings. In the end, the transaction was done exclusively with foreign investors.
As an aside in her letter discussing the new private market proposals, SEC Chairman Schapiro wrote “At no point in time did the staff instruct or advise Facebook or Goldman Sachs that the offering could not be conducted in the United States.” It is not lost on us that, with Congress cutting their funding, the SEC needs all the friends it can get. Thus does Schapiro emerge as Lloyd Blankfein’s new BFF. Next thing you know, he’ll be invited to her birthday party.
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