A risk too far

TALK about bad timing. On January 4th Goldman Sachs said it would buy a stake in Facebook and help its clients to invest in the internet firm too. On January 11th it released a business-standards report aimed at reassuring clients that they came first. Now Goldman has discriminated against hundreds of them. It has reluctantly excluded American clients (and its own partners) from the private share placement for Facebook, citing “intense media coverage”. Only overseas investors will be able to buy into the $1.5 billion offering.

Goldman's fear was that the hoopla surrounding the deal could have been construed as a “general solicitation” that breached America's draconian laws on placements. It is implausible that Goldman tried to drum up public interest. But details of the deal were leaked (by whom is unclear) and the press had a field day. That was enough to persuade Goldman that the risks of going ahead, and being accused of feeding the hype, outweighed the loss of face from shutting out a segment of its customer base.

The firm insists it was not arm-twisted by regulators. But they loomed large in its thinking. It would have been down to the Securities and Exchange Commission (SEC) to judge, after the placement's completion, whether it complied with the rules. If it was found wanting, either Goldman (as underwriter) would have had to buy the stock back at par, or Facebook would have had to go public. The SEC might well have taken a tough stance given that it is investigating trading in private markets and is keen to look relevant after a dire performance in the crisis.

Though most of the excluded clients are said to understand Goldman's predicament, some are angry. The firm's relationship with Facebook has also grown tense. The real villain of the piece, however, may be the 1930s laws that put such a straitjacket on those leading private placements. What does it say about securities regulation when information disseminated to an interested public by the media makes an offering potentially illegal for Americans to take part in but not the rest of the world? In this case, laws designed to protect vulnerable investors have merely ended up preventing a bunch of sophisticated ones from partaking in what might be a juicy opportunity. If the affair sparks a rethink of those rules, some good may come of it.