By Joshua Brown
February 8, 2012

On February 1, Facebook at long last filed its official S-1 document with the SEC, the first step toward an initial public offering (IPO) the company expects to do in the second quarter of this year. Despite the fact that it was widely anticipated, the financial media went absolutely bananas. Facebook was the only subject on television, the radio, the web and in the paper. For a week.

But lost in all of this saliva-covered enthusiasm was the fact that Facebook’s de facto IPO had already occurred a long time ago. Yes, Facebook already went public, you just weren’t invited.

Once upon a time it was both an honor and a privilege to go public. A company worked tirelessly for years just to get to that point and it leapt at the opportunity to do so rather than playing it cool or blowing off bankers when they first came calling. But this was back when being public had benefits that a private company could only dream of — research coverage by Wall Street analysts, access to capital, the ability to cultivate a wide and diverse shareholder base…and did I mention access to capital?

But the exchanges were unhappy with being institutions solely for the benefit for their members. They decided to go for-profit and allow anti-competitive behavior and destructive (but high-paying) new “customers” to suck all the life out of each day’s trading with algorithmic codes. As spreads went from fractions of a share to decimals and then decimals of decimals, the profit margin for making markets in stocks gradually disappeared as well. This led to a annihilation of the market makers and specialists as well as decimation of the brokerage houses that employed analysts to cover the stocks that they traded in.

The end result is that companies come public and struggle for analyst coverage, their shares are whipped about by robot traders and the whims of whatever index ETF basket they happen to be assigned to. The regulation surrounding the reporting of accurate and timely information to their public shareholders has become so onerous and expensive that they’ve essentially clammed up, offering only the most terse and lawyer-approved updates on their business as infrequently as they can.

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And because of this woeful state of our public markets, resourceful and clever companies like Facebook have found a workaround giving them the ability to avoid the big, bad IPO in name only while quietly amassing both capital and a shareholder base. Facebook was essentially forced into going public by SEC rules for companies with more than 500 shareholders.

A comparison between Facebook today, pre-IPO, and almost any other company that is actually public on an exchange yields very little in the way of major differences. Facebook has billions in capital, owing to the umpteen rounds of money-raising at various levels of the venture capitalism sequence. It has thousands of shareholders by virtue of the fact that it has taken money from firms like Goldman Sachs (GS) and DST Partners who themselves have investor capital plugged in. It has the financial press hyperventilating over their every pronouncement as well as a cottage industry of amateur and professional analysts modeling the company’s financials based on any scrap of knowledge that should shake loose from Zuckerberg’s pockets.

And in terms of liquidity, Facebook shares have traded more than $600 million in volume — hundreds of thousands of shares per month — on private exchanges like SharesPost and SecondMarket since last summer. In comparison, there are 464 publicly listed stocks on the Nasdaq that traded less than 200,000 shares last month.

If this were any other market era, Facebook would have come public much earlier in the company’s evolution. It would have had no choice — the relatively few private stakeholders would have demanded the liquidity that comes along with a public offering and the management would have been eager to raise the capital.

In this day and age, however, Facebook’s been able to obtain all of the benefits of being “public” without the formality of actually filing. Bottom line: the only difference between Facebook now and Facebook post-IPO will be the existence of a ticker symbol. Sorry if I dampened your enthusiasm.


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