Why Facebook Is Private

by: Ira Stoll

From a front-page New York Times article today on why Facebook prefers to delay an initial public offering:

Facebook hopes for an even bigger advantage from the deal, the ability to delay an initial public offering. That would allow it to remain free of government regulation...

Those alternatives have become more attractive for companies, in part because of the increased regulations imposed on public companies... Ben Horowitz, a partner with Andreessen Horowitz, a venture capital firm, said the cost of being a public company had risen to about $5 million a year, from about $1 million a year. Mr. Horowitz, an early employee of Netscape, said that such costs would have eaten into the meager profits of the pioneering Internet company when it went public in 1995. Additionally, accounting and legal requirements have become distractions for many start-ups, said Mr. Horowitz, whose firm is an investor in Facebook.

Those "costs of being a public company" increased in part because of Sarbanes-Oxley, the post-Enron financial "reform" legislation signed into law by President George W. Bush.

Contrary to The Times' assertion, Facebook now is hardly "free of government regulation." Like all businesses, it's subject to all kinds of laws related to how it hires, treats, and pays its employees. Other practices, such as how Facebook handles customer information, are subject to government scrutiny regardless of whether the company is public or private.

It may simply be that given some experience with such government regulation, the company's management has decided that if it can choose to avoid adding the additional regulation that comes with being a public company, it will. And it's not just the regulation; it's the litigation. Facebook has been a litigation magnet already, and adding a whole group of public shareholders just increases the pool of potential complainants.

The consequence is to deprive ordinary, mom-and-pop investors from the opportunity to own Facebook shares. By imposing lots of regulations on public companies, lawmakers and regulators think they are protecting such ordinary investors. But such "protection," such as it is, comes at a price, in this case, of depriving them of the chance to invest until later in the game.

Disclosure: None