Daily Archives: December 28, 2010

Is Facebook already a public company?

Hot startup companies face a dilemna: how to generate liquidity for early stage investors and employees without conducting an IPO, or “initial public offering.”

An IPO requires the preparation of a prospectus in a process that is overseen by investment bankers, lawyers, accountants, the stock exchange and, not least, the SEC. Not until the SEC declares a registration statement (which includes the prospectus) prepared by the company and its legal and financial advisors “effective” can a company actually sell its shares to the investing public.

But when that prospectus is filed, even if in early draft form, it becomes public and is available on the SEC’s EDGAR database. And that means the core business model of the company is available for competitors to review.

Some years ago Google ran into a version of this problem. It had handed out more than $80 million of options to buy stock to employees and consultants. At a certain point the company crossed the threshold of 500 investors set by the SEC and, as well, it ran afoul of a ceiling on securities allowed to be issued to employees and consultants by the SEC without disclosure to them.  Google was therefore obligated to file an annual report roughly equivalent to a prospectus or provide recipients of the stock options with details about the company’s business. They did not do so and that led to an SEC investigation and in turn the SEC slapped their wrist, extracting a promise not to do it again.

Of course, by then Google had gotten away with what they had wanted to do: time their IPO without giving up the ability to hand out shares prior to filing their prospectus.

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