Goldman Sachs (GS) suffered a major embarassment yesterday, when it withdrew its offer of up to $1.5 billion in Facebook shares to wealthy U.S. clients. Here is how it explained the decision, in what doubles as Goldman’s first public comment on the Facebook offering:

Goldman Sachs concluded that the level of media attention might not be consistent with the proper completion of a U.S. private placement under U.S. law. We regret the consequences of this decision, but Goldman Sachs believes this is the most prudent path to take.

The law to which Goldman seems to be referring is Regulation D, which involves various qualifications to meet SEC exemptions for registration of securities. More specifically, the following section:

Neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following: (1) Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and (2) Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.

Please note what the regulation doesn’t say: “If your offering gets lots of media attention, then it is illegal.” In fact, every single media outlet in the world could discuss an offering, and that offering could remain compliant with Regulation D. So long as the original source of the information was not the issuer, or anyone acting on the issuer’s behalf.

Goldman’s attempt to blame the media was a sloppy redirect, aimed at obscuring the fact that either Goldman or one of its agents spilled the Facebook beans to the New York Times. Or at least that Goldman strongly suspects that’s what happened.

Kudos to John Carney for being the first to point this out:

Goldman Sachs is full of malarkey when it cites intense media scrutiny as the reason for withdrawing its offering to US clients. In fact, it was media scrutiny that prompted Goldman to tell its US clients about the offering.

Had the source been a legitimate third party, then Goldman would have been in the clear. In fact, I’d even argue that the bank could have confirmed existence of the offering to reports, even though it chose not to do so (acknowledging something a reporter already knows — granted you don’t provide new information — does not constitute solicitation or advertising, no matter what over-cautious lawyers might tell you).

But let me go a step further: I still am not sure Goldman violated Regulation D, even if the leak did come from within. Check out this passage from yesterday’s New York Times:

Goldman had not been planning to initiate the offering that night, but it sped up the process after The Times called the firm seeking comment, according to an executive who spoke on the condition of anonymity because he was not authorized to speak.

That night, a Goldman spokesman declined to comment. Late that night, before the report was published, executives in Goldman’s private wealth-management unit e-mailed their clients about the offering, people who received the e-mail said.

In other words, Goldman’s high-net-worth clients already knew of the Facebook offering before the rest of us did. Assuming that Goldman did not expand the offering beyond that known universe of investors, then it still could be in the clear. If someone like me learned about the offering via public notice , it’s irrelevant since I didn’t have an opportunity to invest (see similar discussion vis-a-vis the Kleiner Perkins sFund announcement). The only reason I hedge a bit here is that the SEC might be able to prove that the leaker couldn’t have known that Goldman would get word out to its investors before the New York Times published its story.

Either way, one thing is clear: Violations of Regulation D are rarely pursued by the SEC. I’ve reported on hundreds of active private placements, and never once has the relevant issuer been charged (even though, in some cases, the leaker has been fairly obvious). In fact, some private equity firms even distribute press releases when they have a “first close” on a new fund. Pretty sure that’s industry jargon for: “We raised some money, but are looking to raise more.”

Hmmm…. Maybe Goldman Sachs was right. The media attention didn’t cause it to (possibly) violate SEC rules. But it did get the SEC to pay special attention…