Why pretend Facebook is a sure thing?

Dear NY Times,

Please stop writing about corporate finance. Nobody who worked on this article appears to know anything about securities laws, corporate finance, reasons companies go public, or how to read past issues of this paper.

  1. Securities laws: Facebook is subject to the same fundamental law as every other company: Rule 10b5, which says don’t make false or misleading statements to investors. From this perspective, public companies (more precisely referred to as reporting companies to signal the difference) are required to file regular reports for investors. These include the quarterly 10-Q and the annual 10-K. Non-reporting companies have internal contractual requirements that dictate what information they give to investors and when. Here are some common venture capital financing information rights:

Delivery of Financial Statements.

The Company shall deliver to each Investor who holds at least ___________ shares of Series A Preferred Stock:

(a)            as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet of the Company and statement of stockholder’s equity as of the end of such year, and a schedule as to the sources and applications of funds for such year, such year‑end financial reports to be in reasonable detail, prepared in accordance with generally accepted accounting principles (“GAAP”), and audited and certified by independent public accountants of nationally recognized standing selected by the Company;

(b)           as soon as practicable, but in any event within thirty (30) days after the end of each of the first three (3) quarters of each fiscal year of the Company, an unaudited profit or loss statement, schedule as to the sources and application of funds for such fiscal quarter, an unaudited balance sheet and a statement of stockholder’s equity as of the end of such fiscal quarter and a statement showing the number of shares of each class and series of capital stock and securities convertible into or exercisable for shares of capital stock outstanding at the end of the period, the number of common shares issuable upon conversion or exercise of any outstanding securities convertible or exercisable for common shares and the exchange ratio or exercise price applicable thereto, all in sufficient detail as to permit the Investor to calculate its percentage equity ownership in the Company.

(c)            within thirty (30) days of the end of each month, an unaudited income statement and schedule as to the sources and application of funds and balance sheet for and as of the end of such month, in reasonable detail;

(d)           as soon as practicable, but in any event thirty (30) days prior to the end of each fiscal year, a budget and business plan for the next fiscal year, prepared on a monthly basis, including balance sheets and sources and applications of funds statements for such months and, as soon as prepared, any other budgets or revised budgets prepared by the Company; and

(e)            with respect to the financial statements called for in Sections 4.1(b) and (c), an instrument executed by the Chief Financial Officer or President of the Company and certifying that such financial statements were prepared in accordance with GAAP consistently applied with prior practice for earlier periods (with the exception of footnotes that may be required by GAAP) and fairly present the financial condition of the Company and its results of operation for the period specified, subject to year‑end audit adjustment.

Additional Information and Rights.

The Company will permit any Holder, so long as such Holder (or its representative) owns at least _________ Registrable Securities, or such number of shares of Common Stock issued upon conversion of _______ or more Registrable Securities, or any combination thereof (as presently constituted and subject to subsequent adjustment for stock splits, stock dividends, reverse stock splits, recapitalizations and the like) (a “Significant Holder”) (or a representative of any Significant Holder) to visit and inspect any of the properties of the Company, including its books of account and other records (and make copies thereof and take extracts therefrom), and to discuss its affairs, finances and accounts with the Company’s officers and its independent public accountants, all at such reasonable times and as often as any such person may reasonably request.

The same law governs these statements as the 10-Q in terms of not making material misstatements. Yet here’s the RSS tagline for the article:

Flush with cash, Facebook may be able to delay an initial public offering of stock and remain free of government regulation.

The only thing that Facebook will remain free of is reporting obligations that make their data available to the general public and competitors.

  1. Corporate finance — the current investors in Facebook are subject to qualification under the securities laws. Individuals are generally required to be accredited investors, meaning they meet certain income or net worth tests. The creation of investment funds, like the Goldman Sachs investment you describe, are designed to comply with the laws, not “skirt” them. The SEC addressed these permutations long ago and created regulations to divide permissible private offerings with a given set of requirements from de facto public offerings with a different set of requirements. Even the vaunted 500 shareholder number is designed to separate companies into these two types.

The investment world does not thrive on heads I win, tails you lose bets (except, perhaps for brokerage commissions!). The answer to whether opening investment in venture-stage companies to the general public is okay seems to turn on whether they’re going to be successful, as if that answer is known in advance. Plenty of companies, big and small, public and private, fail miserably. Some succeed. It’s just silly, and frankly disingenuous, to suggest that the general public, not deemed by the paternalistic securities laws to be capable of protecting themselves, are being kept away from some sort of free money deal; at least it’s silly to do so without acknowledging the reason those laws prevent them from taking part in such investments is to keep them from losing money when they don’t understand what’s going on.

Please correct this mismatched theory/application mashup and remove any hint that ordinary investors are getting scammed by not being able to invest in Facebook. Instead, remind them how much money they lost on Webvan and pets.com. That sort of article might educate readers, especially those without knowledge of the securities and venture capital industries, what the real issues are. The article you wrote belongs in USA Today. I’m sure you could at least dig up some of those post-dotcom bust articles and link to them (that might even help monetize the archives) to round things out if new words cost too much.

/s/ ThoughtStorm Strategic Capital