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Facebook Dodges Registration, Can’t Hook Twitter

fb twitterWhen a company goes public it inherits the responsibility of regularly disclosing its financial performance in SEC mandated filings.  Usually this burden is a willing sacrifice in exchange for new monies or the liquidity of a public trading market.  Every now and again, however, a private company can be forced to register and report even when it’s not in their near-term plans.  Facebook has just managed to avoid stepping into this minefield.

The securities law, specifically Section 12(g) of the Exchange Act, requires companies to register if the number of shareholders or the value of the corporate assets exceed certain thresholds.   Per a rule that went effective December 7, 2007, these thresholds for employee stock plans were set at 500 option holders, or assets in excess of 10 million (SEC Rule:

Facebook’s stock plan was apparently nearing the 500 person boundary. 

Facebook’s attorneys petitioned the SEC for an exemption.  In a letter first reported by BusinessWeek, the SEC agreed to provide it.

“Based on the facts presented,” SEC Senior Special Counsel Anne Krauskopf wrote “the Division will not object if Facebook, Inc. does not comply with the registration requirements of Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act") with respect to restricted stock units granted and to be granted pursuant to the Company’s 2005 Stock Plan”

The ruling is only applicable to the stock plan and not Facebook’s preferred classes of stock.

With the exemption and official “no action” letter, the company will avoid an issue many believe was an underlying determinant in Google’s decision to go public in 2004. 

Given the state of public markets, not to mention the company’s still developing revenue model, it seems a particularly fortunate result for Facebook.

Less fortuitous – Facebook’s widely rumored efforts to acquire popular web 2.0 service, Twitter, were accurate but have apparently failed.

After weeks of rumors linking the two companies, reports are now saying the companies did in fact discuss an acquisition but were unable to reach terms.  Talks broke down three weeks ago.

Facebook was looking to acquire the microblogging service for $500m in stock, reports say.  That price, however, was tied to a valuation that pegged Facebook’s worth at $15billion.

That number, drawn from Microsoft’s investment in the company in October 2007, has been batted around. Many have speculated it’s unrealistically high for a company with limited revenue production (a problem, incidentally, Twitter also has).

If Facebook were valued at a more modest $5billion, the offer to Twitter would have been valued at only about $165m.

While still not trivial, in June, Twitter closed a financing with an estimated valuation of $98m.    

Facing the heightened risks of taking equity from a company potentially over-valued and with an uncertain revenue generation plan, Twitter investors apparently wanted more upside. Instead they’ll try and figure out how to draw revenue on their own.

(For those looking for more information on Securities Law, checkout Startup Company Lawyer, a blog from Wilson Sonsini (WSGR) partner Yokum Taku)

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