Goldman Sachs: the Many-Headed Hydra

There are many ways a bank like Goldman Sachs can get its own way. Goldman Sachs can lobby politicians for tax breaks, protection and contracts. Or Goldman Sachs may find its own people in positions of power where they can influence financial decisions made at the highest level. Sometimes politicians themselves help to promote rules and regulations that are favorable to certain organizations. At present, the SEC is looking at "modernizing" certain rules that govern companies such as Facebook who have to publicly disclose their finances when more than 500 shareholders buy in. Darrell Issa, House Oversight Committee Chair, is concerned that such rules may be "impeding capital formation" as related in the article below:

Congress to quiz SEC on private-share trading
By Sarah N. Lynch - Reuters (Washington) May 10, 2010

(Reuters) - U.S. rules on the trading of private securities will be the subject of a hearing on Tuesday by lawmakers concerned that the regulations may be stifling the formation of capital.

Goldman Sachs, in a high-profile case, was spooked into limiting an offering of Facebook shares in January to foreign investors out of fear that a sale of the private shares to U.S. customers would violate the rules.

Securities and Exchange Chairman Mary Schapiro and SEC corporation finance director Meredith Cross will appear together at the House Oversight Committee after its chairman, Darrell Issa, questioned whether U.S. rules governing the trading of private shares are outdated and hinder the creation of capital.

The SEC is analyzing whether its rules for private-share issuances are still relevant in an era of buzzed-about offerings, complex investor pools, and online trading platforms that allow investors to quickly swap hot tech company shares.

Schapiro has not said when or how the SEC may modernize these rules, which have prompted cash-hungry companies such as Google to go public and have dictated how investors can get an early piece of the action.

The SEC is also monitoring the lightly regulated world of private-company share trading on online platforms such as SecondMarket and SharesPost. SecondMarket confirmed in January it had received a request from the SEC for information, and its chief executive, Barry Silbert, will be also be on hand to testify Tuesday.

The trading of private shares has featured prominently in the media lately as Wall Street banks and electronic markets seek to offer investors a chance to actively trade stakes in hot technology companies such as Facebook, Zynga and Twitter before they go public.

Goldman had planned to offer U.S. investors a chance to buy Facebook shares but ultimately opted only to sell the shares to foreign investors because of intense media coverage of the deal.

Although the SEC did not ask Goldman to limit its offering, Goldman was concerned the media coverage could have violated a general solicitation ban for private offerings that is intended to protect investors.

The Goldman-Facebook deal also drew attention to another old rule on the books that determines when a company must go public.

Under current regulations, companies must begin filing regular financial disclosures if they exceed 500 shareholders of record. But Goldman Sachs had found a legal way to get around this rule by using a special purpose vehicle that aggregated investors into one.

Schapiro has said the SEC is looking at these rules to see if they should be modernized, and that the SEC is also examining whether regulatory relief should be available for a new capital raising strategy known as "crowdfunding" in which a group of people pool their money together to invest in a business opportunity.

In addition she added that the SEC is reviewing the electronic trading of private shares, noting in a letter to Issa that these platforms raise concerns that the "pricing of securities may be influenced by conflicted market participants who may be buying and selling for their own account as well as facilitating transactions" for others.

On Tuesday, Issa is expected to raise concerns about the outdated rules and whether they are impeding capital formation.

Read the entire article here