Facebook has raised $500 million from Goldman Sachs and Russian investment firm Digital Sky Technologies, in a deal that values the world's No.1 Internet social networking company at $50 billion, according to a person familiar with the matter.
The firms also plan to raise at least $1 billion in additional funding for Facebook, the person said speaking on condition of anonymity.
The funding, which gives Facebook a richer valuation than established Internet giants such as Yahoo Inc and eBay Inc, underscores the high hopes investors have riding on the new breed of private Web companies.
And it comes as the Securities and Exchange Commission has begun to look into the trading of shares in private companies such as Facebook and Zynga according to media reports.
Facebook, whose online service counts more than a half a billion users worldwide, has shown little interest in floating shares to the public, even as investors clamor to get a piece of the company that many believe could become the next Google.
By raising money from private investors, Facebook can reap many of the benefits that traditionally require undertaking an initial public offering without facing the added scrutiny of the public markets, said Jeremy Liew, managing director at venture capital firm Lightspeed Venture Partners, which is not a Facebook investor.
I don't think it's a replacement for a public offering, I just think it's a mechanism for delaying it, said Liew.
Among the key benefits of raising money privately is the ability for early employees to cash out some of their stock holdings.
Last week, online-coupon site Groupon disclosed in a regulatory filing it was raising $500 million, with plans to use the bulk of the funds to repurchase shares from existing shareholders.
And Facebook arranged for DST to purchase at least $100 million of common shares from its employees in the summer of 2009, following a separate investment in which DST bought $200 million of Facebook preferred shares at a $10 billion valuation.
Wedbush Securities analyst Lou Kerner said regulation like the Sarbanes-Oxley Act had made it very expensive and onerous to be a public company.
As a result a lot fewer companies are going public, he said.
However, as more private investors acquire stakes in Facebook, the company risks hitting the 500 shareholder threshold, at which point it would be required to start filing as a public company with the SEC.
Facebook board member Peter Thiel told Reuters in September that Facebook would not likely undertake an IPO until sometime after late 2012.
Facebook and Goldman Sachs declined to comment on the deal. Digital Sky Technologies could not be reached for comment.
In Facebook's latest investment round, which was first reported by the New York Times, Goldman Sachs will invest $450 million in the company, while DST will invest $50 million, according to the source.
Goldman is planning to create a special purpose vehicle to allow its high-net worth clients to invest in Facebook, the paper reported.
It has the right to sell a part of its stake, up to $75 million, to Digital Sky Technologies, the paper said.
Facebook is among the new crop of Internet social networking companies, including Groupon, Zynga and Twitter, that have become increasingly popular among Web surfers.
In 2010, Facebook overtook Google to become the most visited website in the United States, according to online analytics firm Experian Hitwise.
(Reporting by Alexei Oreskovic and Nadia Damouni; editing by Lincoln Feast, Richard Chang and Bernard Orr)