Reporting from New York — Goldman Sachs Group Inc. has abandoned a widely criticized plan to privately sell as much as $1.5 billion in Facebook Inc. shares to wealthy U.S. clients of the Wall Street firm and instead will offer the stock only to foreign investors.
The offering came to light about two weeks ago when Goldman agreed to invest $450 million of its own money in Facebook in a separate transaction that valued the fast-growing Internet company at $50 billion.
At the time, some commentators condemned the plan for a private offering because it limited the opportunity to invest in Facebook, whose shares aren't publicly traded, to people rich enough to be customers of Goldman's wealth management service.
Goldman said Monday that it was now barring all American investors from the deal because of U.S. rules that prohibit banks from publicly soliciting investors for deals like the Facebook investment.
Although Goldman had not publicly discussed the offering, word of it leaked out and the bank said it eventually determined that the "intense media coverage" could be considered public solicitation by regulators.
"The extent of the media feeding frenzy was a surprise," Goldman spokesman Lucas Van Praag said. "We just ended up in a bad place."
Foreign investors will be allowed to take part in the deal because regulations overseas regarding public solicitation are less strict, Van Praag said.
The move is likely to prove unpopular with the U.S.-based Goldman clients who reportedly had placed more than $7 billion in orders for Facebook shares, more than four times the amount available. Van Praag would confirm only that there was "intense interest" in the Facebook offering among Goldman's clients.
Experts on securities law said Goldman's switch reflected the strict regulatory climate in this country. The Securities and Exchange Commission reportedly had been looking into the Facebook deal, but Goldman said no one had asked it to withdraw the offering.
Jacob Frenkel, a former SEC lawyer, said Goldman was smart to be cautious, particularly after the SEC sued it last year over its disclosures to investors in a complex transaction during the mortgage boom. Goldman settled that suit by agreeing to pay $500 million.
"I don't think anyone was expecting this — but it is understandable," Frenkel said.
James Cox, a law professor at Duke University, said Goldman was only the latest firm to move an investment overseas because of strict U.S. laws on private placement deals.
"We just have too many restrictions," Cox said. "This is one area where I think it has gone way too far."
Goldman's announcement Monday marked the first time that the firm publicly acknowledged the deal and explained how it would work. Under the offering, Goldman clients won't invest directly in Facebook. Instead, they will put money into a specially created entity that will acquire the Facebook stake.
Facebook will decide how much stock it wants to sell, with the upper limit set at $1.5 billion.
The deal has been seen by some experts as a way for Facebook to raise money without violating a U.S. rule that requires companies to publicly report their financial results once they have more than 500 shareholders. Goldman structured the offering so that the new entity would count as only one shareholder.
After reporting $355 million in earnings on revenue of $1.2 billion for the first nine months of 2010, Facebook is certainly big enough and profitable enough to go public. But the company has resisted doing so, apparently out of a desire to keep a veil over its operations as long as possible.
But offering documents for the Facebook stock sale being managed by Goldman show that the Palo Alto company expects to exceed 500 shareholders this year, which could force the company to begin making financial disclosures to the public as early as April 2012.