02/19/2011 03:18 pm ET Updated May 25, 2011

Social Media Investors? Transparency Benefits All

Last week on the new talk show with Piers Morgan, which I thought would be a disaster (game show host?) but turns out to be credible journalism, The Winklevoss Twins talked about their ongoing lawsuit against Mark Zuckerberg. While the two Harvard boys, Cameron and Tyler, earned a settlement of $15 million cash and $45 million in Facebook shares, their biggest issue now is "discovery." How do they find evidence of what Facebook is really worth now and how the growth occurred since the Winklevoss family first allegedly conceived the idea.

Facebook ( has eclipsed five hundred million members. Most notable, of course, is Facebook's "Big Brother-like" view toward its users' whereby search engines can catalog that information and which users are targeted by what ads based on it. Facebook is doing everything in its power to resist an IPO and the quarterly task of jumping through the hoops investors hold up

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Mark Zuckerberg recently made a cameo on Saturday Night Live. Even the movie showed him as a brilliant tech geek with a personality but perhaps also insecurity. This week he meets with titans of tech and the President of the U.S. See today's New York Times story on how the President is interfacing with Zuckerberg and other top execs this week.

Follow the MoneyGoldman Sachs made a $450 million investment in Facebook, and that would appear to be a major victory for the bank, but the deal marries what are arguably questionable practices. The issues at stake deal with transparency and disclosure. And, here's why the Securities and Exchange Commission is apparently investigating whether potential investors have access to sufficient information about a company (Facebook) that is not subject to disclosure rules, and why professionals in the financial services industry should be concerned.

In terms of background, the SEC Act of 1934 puts forward certain criteria under which companies must register their shares with the SEC. One of those provisions is if a company has 500 or more shareholders of "record" in a particular class of equity.

Most of the time, however, individual investors are not the shareholders of "record." That would be the brokers, or other third-parties, who hold the shares "beneficially" on the investor's behalf. The net result is that companies with thousands of "beneficial" shareholders will often have fewer shareholders of "record."

Goldman's "special-purpose" vehicle will allow Facebook to classify investors in the offering as a single shareholder, thus circumventing the SEC's 500-record-holder reporting rule; this, despite what almost certainly will be more than 500 of its clients becoming "beneficial" Facebook shareholders. After all, Facebook's IPO, if and when it happens, already is said to be wildly oversubscribed.

To the oft-criticized SEC's credit, it anticipated just this sort of gerrymander. Its definition of "record holder" thus stipulates that, if a company knows the form of holding securities -- in this case, the so-called "special purpose vehicle" -- is being used primarily to circumvent the provisions of the 1934 Act, the "beneficial" owners shall be considered to be the "record" owners.

Among other benefits, the SEC saw its 500-person rule as a way of ensuring transparency on the part of companies offering shares for sale to the public, by ensuring potential investors would have sufficient information on which to base their investment decisions.

Maybe Goldman's clientele doesn't want or need this type of protection. But not all investors are created equal. Some may have more acumen than others. Facebook should do the right thing and start reporting its results publicly, via quarterly and annual reports, containing the company's audited financial information. For a company that encourages hundreds of millions of users around the world to share the most intimate details of their personal lives with each other, it's ironic that Facebook is attempting to keep this information private.

Facebook users are asked to trust its private company to protect their personal data. Yet privacy of FB users remains at stake. And transparency in its communcations remains a PR issue. Just ask the Winkelvoss family