How Federal Accounting & Securities Regs Screw Up Your Chance to Invest in Facebook

by on January 4, 2011 · 2 comments

As Henry Blodget explained in his excellent Business Insider column yesterday, “Goldman Sachs Clients Can Invest In Facebook’s IPO — But You Can’t,” America’s increasingly counter-productive accounting, disclosure, and governance regulations are increasingly thwarting the ability of average Americans to invest in the leading capitalist companies of the Digital Age:

in an effort to protect investors from fraud (which is actually not the reason most IPOs fail), the government erected huge new barriers to going public, making it prohibitively expensive for most small companies to IPO.  So now small, speculative companies generally don’t IPO.  Instead, they stay private. And/or they do what Facebook just did, which was do a “private IPO” with Goldman Sachs. What’s a private IPO?  It’s a mechanism in which Goldman’s rich clients can invest in Facebook. But you can’t.  Seriously!

And that’s why Facebook, among others, don’t want to go public. Over at the Truth on the Market Blog, Larry Ribstein elaborates on the insanity of this:

the increased costs of being public have helped exclude ordinary people from the ability to own the stars of the future.  Back in the 1980s, you could just call your broker and get rich off of the Microsoft IPO.  Now you have to be a wealthy Goldman client to do it.  Of course you also got to get poor off of a company that turned out to be a dog.  Now both options are reserved for wealthy people in the name of increasingly onerous disclosure regulation and federal governance requirements such as board structure, proxy access, and whistleblowing rules.

Each of these rules was thought to have some benefit at the time they were enacted.  Nobody really considered how private markets would react (e.g., by establishing alternatives to public markets) or the long-run effects of substituting quasi-private for public markets.  So rules designed to make the markets safe for ordinary investors have ended by excluding them.

Maybe it’s time to start considering whether we got what we wanted.

Amen, brother. This is another classic example of well-intentioned regulation having profoundly unintended, anti-consumer, anti-competitive consequences.  People are being denied the ability to own a piece of the American dream and the competitiveness of some of America’s leading businesses is being adversely impacted at the same time.  What a shame.

  • Pingback: More on Facebook’s “Private IPO,” Securities Regs & Unintended Consequenses()

  • Adam Thierer

    Update: Wall Street Journal columnist Gordon Crovitz wrote more about this issue in his 1/10/11 column, “How Washington Defriended Investors,” and concluded:

    “The goal of securities regulation should simply be to ensure that accurate information gets to the market as quickly as possible. By this measure, the regulations of the past decade have undermined public stock markets and their vibrant flow of information about companies. Now that Washington has defriended investors, the would-be investing public should defriend the politicians who took away their markets.”

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