Goldman’s US clients to miss Facebook share sale

Goldman Sachs has told its US clients that they will not, after all, be able to buy a piece of Facebook, as its $1.5bn fundraising plan for the social networking company turned from a controversy into a major embarrassment.

The investment bank wrote to clients to say that only those based overseas would be able to buy shares in Facebook, saying it no longer believed its plans to offer shares in the US complied with US law.

Goldman said last month that it was going to invest $450m of its own money in Facebook and then raise $1.5bn from wealthy clients and institutional investors for a new fund that would buy new Facebook shares. The plan meant that the social networking site, launched by Mark Zuckerberg in 2004, was able to privately raise a large sum of money without having to abide by the financial disclosure rules that govern stock market flotations.

Although it gave no specific reasons for the sudden U-turn, the bank cited “intense media speculation”. US securities laws impose even tougher rules on private placements than they do on stock market flotations, barring intermediaries such as Goldman from soliciting investors with advertisements or by talking to the media. The Securities & Exchange Commission, Wall Street’s regulator, has been examining the Facebook plan ever since it was announced, and has also been concerned about the possibility of future insider trading by people that receive secret financial details about the company.

Goldman’s wealthy clients, who would have been required to buy a minimum of $2m of Facebook shares, had flocked to get a piece of the action. According to some reports, the $1.5bn fundraising was three times oversubscribed, even at a price that values Facebook at $50bn. The debacle prompted an expression of “regret” from Goldman last night.

“The transaction generated intense media attention following the publication of an article shortly after the launch of the transaction,” the bank said. “In light of this intense media coverage, Goldman Sachs has decided to proceed only with the offer to investors outside the US. “The level of media attention might not be consistent with the proper completion of a US private placement under US.”

And it added: “The decision not to proceed in the US was based on the sole judgment of Goldman Sachs and was not required or requested by any other party. We regret the consequences of this decision, but Goldman Sachs believes this is the most prudent path to take.”

Facebook had signalled that, while it may not be going public now, it expected to do so next year, and Goldman was seen as the frontrunner to lead the flotation - a deal that could generate tens of millions of dollars in fees for the bank. But last night’s announcement intensified rumours that the relationship between Goldman and Facebook has become strained.

It was also not immediately clear if closing the door to American clients would also mean Goldman has to scale back the amount of money it can raise for Facebook.