Technology

Facebook Gets SEC Stock Exemption


The social networking giant received a waiver from the Securities & Exchange Commission so it can keep handing out equity to new employees

Earlier this year the social networking site Facebook grew concerned that an obscure securities regulation might force the privately held company into the spotlight. Under the Securities & Exchange Act of 1934, a private company must start disclosing financial results publicly once it has more than 500 stockholders and $10 million in assets. It's the same law that helped push Google (GOOG) to go public back in 2004.

Facebook doesn't have 500 shareholders yet, but it's fast approaching that threshold as it hires new employees who often get equity in the company. In a letter written to the SEC obtained by BusinessWeek, lawyers from Facebook counsel Fenwick & West wrote that the company "anticipates that it could in the future have more than 500 holders" of restricted stock. In the 10-page letter, Facebook argued that there's no need to meet the SEC disclosure requirements, since only insiders are getting the equity, and they're not paying for it.

EASE AND FLEXIBILITY

The lobbying worked. On Oct. 14 the SEC handed Facebook the exemption, according to a letter from the SEC's Corporation Finance Div. obtained by BusinessWeek. Facebook will enjoy the exemption until the company goes public or is acquired or merged with another company. "This really obviates the pressure that Google might have felt," says Keith Higgins, a partner with Boston law firm Ropes & Gray who does not work for Facebook. "It provides them with a good deal of flexibility."

The SEC move is one sign of the extraordinary steps Facebook is taking to keep growth on track in the face of a sharp economic downturn. The company is also launching new advertising programs, rolling out versions of Facebook in a multitude of new languages, and gearing up for acquisitions, especially of Internet startups that have plunged in value. "Six to 12 months ago, many of these companies were priced to perfection," says James Breyer, a managing partner of venture firm Accel Partners who also is a Facebook director and investor. "My expectation is there will be highly attractive acquisitions for Facebook in the next 12 to 18 months."

The SEC exemption helps Facebook continue to grow by allowing it to lure top talent. Facebook executives and directors see the downturn as a golden opportunity to attract and poach the best and brightest engineers and Internet executives from around the world. Sheryl Sandberg, the company's 39-year-old chief operating officer, says she learned this trick while working for Google during the dot-com bust. "When I was at Google we were the only place hiring," recalls Sandberg. Now, she says, the "competition for talent might get a little easier."

TAX ADVANTAGES

The SEC exemption covers Facebook's distribution of restricted stock, one of several forms of equity the company hands out. Restricted stock typically can't be transferred or sold, and it gives the holder the right to receive a specified number of shares of common stock following a merger or public offering. It also has certain tax advantages over common stock. Holders of restricted stock are not taxed until the stock vests and is distributed, and holders don't have to pay anything to acquire it, unlike with stock options. "It's a tax efficient way to give out equity," says Higgins.

Facebook also distributes some stock options and stock purchase rights to employees, directors, and consultants as compensation. Facebook did not have to seek an exemption for the stock options. In December 2007, the SEC approved a similar exemption to private companies that have issued stock options.

Ante is an associate editor for BusinessWeek.

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