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James Hong

Friday, September 07, 2012

Will this create even more downward pressure on Facebook stock?

My friend Yishen Kuik of Katong Capital made a keen observation today..

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Everyone knows that Eduardo Saverin, the Brazilian co-founder of Facebook, gave up his dual US citizenship just prior to the IPO of Facebook, and presently resides in Singapore. Lots of misinformed articles have been written about him as a tax dodger.

By leaving the US, he will trigger the Heroes Earnings Assistance and Relief Tax Act of 2008, which is Orwellian DoubleSpeak for an exit tax on 15% of his capital gains. The trouble is, when the Exit Tax is calculated, it is on the valuation of the stock on the date of renunciation.

No doubt Saverin was advised to time his renunciation prior to the IPO because most IPOs are engineered to pop and rise thereafter, as Mark Cuban is aware. FB however did not perform thus, and has dropped 50% since. What this means is that Eduardo is down 65% from when he made his renunciation. In order to pay the 15% tax, if he hasn't already sold stock, he will now have to sell 30% of his stock to do so. Based on his 4% ownership of the company, this is about 1.2% of the shares outstanding.

Of course what is left is still sufficient to support several lifetimes of spending, that is unless you are an NBA basketball player

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