500 Rule and Peter Thiel's Facebook IPO, history repeating

I decided to post this because of a disturbing trend in my opinion of media outlets choosing which news to syndicate. This was reported on CNBC over 3 hours ago of, yet no headlines regarding it. Nothing from Dow Jones, WSJ, NYT or any other sites who regularly report about technology or Facebook. But I shouldn't be that surprised. In addition to this story, I wanted to show the similarities between what's happening with Facebook and what happened with Paypal.


On CNBC's Power Lunch this morning Melissa Francis, Dennis Kneale, Brian Shactman, CNBC Silicon Valley Bureau Chief Jim Goldman reported that Facebook may be forced to open up their books and disclose their financials due to a SEC rule, despite CEO Mark Zuckerman saying he was in no rush to file an IPO. Facebook is valued at 11.5 billion dollars

Facebook has been "cagey" about both its financials and ipo plans but according to Jim Goldman "this financial cat & mouse may be coming to a close and you can thank the the 500 investor rule"

Note: I remember when Peter Thiel with Paypal not being in any rush either. You know, Peter Thiel who has his and other former Paypal people invested in Facebook. And valuation questions back then with Paypal? Yup, it's called a quiet period where they couldn't comment.


That rule states that once you have over 500 investors and 10 million in assets, you have to file financials with the SEC. Facebook has been able to skirt that due to two reasons:

First it issues restricted stock units, keeping the actual investors low and it was able to obtain an exemption from the Securities and Exchange Commission regading those restricted shares.

A Facebook spokesperson told Jim Goldman that it was comfortable it had not tripped the 500 rule. Quote "We are comfortable the company is not at risk of tripping the "500 investor" rule"


The problem is, according to Jim Goldman is that these restricted stock units were only issued beginning in 2008, and that the company awarded stock options as late as 2007 to whom appears to be several hundred workers. And that since the SEC issued the exemption, trading in pre-IPO shares on the secondary market has soared, thus putting the exemption in jeopardy.


secondmarket.com tells Goldman that Facebook trading last year totalled 60 million in trading activity on their site. Two months into this year, trading is over 65 million. Just about everyone wants an accurate valution of the company and ipo plans.


DK: Saas Institution, one of the largest private held software companies in the world they released their results their results even though they didn't have to. The only reason to be reluctant to release your results, Jim, is because you don't have any. Maybe Facebook's profits are far less or the losses are far bigger than we realized.

JG: I think that's a really good point, remember we went through this with Google leading up to that companies IPO plans. Everyone was saying that they tripped the 500 rule and Google basically wanted to keep its financials private because they were so extraordinary and they didn't want to tip their hands to all their customers, just how much they were charging and how much it was leading to a rather swollen profit line as we all know since then. I think Facebook is a decidely different story, as you suspect. Revenues? I'm not sure how big they are, nobody seems to know accurately how much the are but we all seem to agree that the profit line is next to non-existent even though this company has been in business for so long. It's going to be a problem for these guys until people get a real idea Note: Paypal was burning through heavy losses too, including breaking the law, facilitating gambling. No risk tools in place until they had to. Chargebacks from fraud, and then seizing customer deposits. Using the stored value to hedge their risk.


DK: The fallout guys, is.. Do we think that facebook now, if it's forced to open up the financials. Do the IPO Jim? Rush up the ipo?

MF: WOW

BS: My question to Dennis or Jim is, why is this such a bad thing. Even if they're not making alot of money, don't you think there would be a huge appetitie for a piece of this company. If the market's healthy?

DK: Aren't we stung by the 2000 bubble, we bought. You know 100 times revenue for pets.com

MF: Obviously not, you have all these people trading this stock on the secondary market. But doesn't that make you a traded stock? I means it's out there, it's traded on the 2nd market. The cats out of the bag

JG: It's definitely out there and it's definitely traded and I think that's gonna problem for these guys if they try to say its not if they say its not, #1. #2,as far as the appetite for this company, we've all been out there for eyeball valuations before. The question now is does Facebook really have a nice strategy of profitability. We'll get that idea when this company opens up its books
the problem is you've got so much interest in this company right now but all that interest is based on promise and not necessary on profits


http://www.cnbc.com/id/15840232?video=1434981883&play=1

I can only wonder if Peter Thiel plans to do it again, and get his hands on the stored value and when Facebook becomes the gambling parlor when internet gambling gets passed (which is soon, ask California oh hey Meg Whitman!)

Edit to include link back http://www.cnbc.com/id/35764633
----------------------------------
Restricted Stock Units since 2008
Stock options until late 2007
Secondary Maeket activity soaring