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Facebook's Upside and Downside From Its $500M Financing

CNBC.com

There's no question Facebook raising $500 million in financing from Goldman Sachs and Russian investment firm Digital Sky Technologies is meaningful for the company.

It's a massive vote of confidence — Wall Street believes in its business model. Perhaps most importantly, this cash will allow Facebook to grow and better compete with the likes of Google without having to go public.

Facebook's Upside:

It can ramp up hiring. Facebook only has 2,000 employees, just a fraction of those at the likes of eBay, Yahoo or Google. And not only can Facebook hire more engineers and ad sales execs, it also has the cash to steal top hires from rivals like Google.

This money will fuel acquisitions. Facebook could use this kind of cash to buy a company like Google's AdSense — the kind of technology it needs to deliver the 1 trillion display ads it'll serve this year.

All in all, this money is funding Facebook's growth into an even bigger superpower.

And this money could allow some investors and employees to cash out without Facebook having to go public.

Facebook's Potential Downside:

This investment designed to delay the need for an IPO could ultimately be what pushes the company in that direction. Why? The SEC requires companies with 500 or more investors to disclose their financial results — a key push to go public. And Goldman Sachs is expected to create a "special purpose vehicle" that would be treated as a single investor — a loophole that's likely to draw scrutiny from the SEC.

The SEC is already inquiring into Second Market, which is now the main platform for investing in private company shares. (In November it traded $40 million worth of Facebook shares). Facebook continues to be a hot commodity — there are no reports of a spike in interest since the news of the new valuation leaked out, but interest in Facebook on the trading platform remains high.

CEO Mark Zuckerberg has made it crystal clear that he's in absolutely no rush to go public. But should the SEC crack down on what exactly qualifies as 499 investors, the company could be forced to disclose a lot more information than it would like to, and that could push it to go public. It's worth noting that private market interest in Google and Microsoft played a crucial role in those companies deciding to IPO.

Questions? Comments? MediaMoney@cnbc.com

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  • Working from Los Angeles, Boorstin is CNBC's media and entertainment reporter and editor of CNBC.com's Media Money section.