Would you buy shares in Facebook?

While Mark Zuckerberg, CEO and founder of Facebook has stated many times he doesn’t want Facebook to issue public shares (an IPO), 2011 looks likely to be the year the company has to. It’s all down to some rather mundane rules of the SEC (Securities and Exchange Commission ) in the US. The SEC requires companies with more than 499 investors to disclose their financial results to the public.
In 2008, the SEC allowed Facebook to issue restricted stock to employees without having to register the securities. The company has also tried to limit the number of employees selling shares. This year, Facebook put in place an insider trading policy that bars current employees from selling stock. Despite Facebook’s best efforts, private trading in its shares has skyrocketed in recent months, much to the alarm of many senior Facebook execs, including Zuckerberg who has said Facebook is an ‘unfinished project’. He doesn’t want to relinquish control of it just yet.
The latest jaw-dropping purchase of private Facebook shares was by Goldman Sachs. Its planned $500 million investment in private shares could put the value of the social network at over €50 billion. That’s if the SEC allows the deal to go through. Goldman’s plan to create a ‘special purpose vehicle’ that will act as one shareholder for multiple private investors will come under scrutiny. If I was Zuckerberg I’d be hoping that the SEC refuses to allow Goldman’s plan to go ahead. Why? Because any over-valuation of the company before it goes public would lead to a rapid and extremely damaging, diminished valuation of the company as the share price drops after the IPO – think the year 2000 eircom shares debacle in Ireland, but this time on a global scale.
Buying stock like this on the private market before an IPO is what many savvy, wealthy traders have made their billions from. However, once the shares go public on an overvalued company, the post IPO world of Facebook could burn the fingers of all the smaller investors.
Then again, Facebook really could be worth €50 billion and more and in that case shares in it would be a good buy.
The big elephant in the room remains, however. If the company had plans of going public in the near future, no sophisticated investor would sell their private shares today, unless they believed the company was already overvalued.