It subsequently transpired that Facebook was planning to address the 500 rule itself by going public or publishing full accounts.
While Goldman never commented on the private placement, the bank's officials believe the "intense media attention" that the deal generated around the world was threatening to scupper the deal in the US.
American law prohibits "general solicitation and advertising" in private offerings, banning banks from promoting an offer by taking out advertisements or communicating with media outlets.
A Goldman representative said that the media coverage could have been interpreted by regulators as marketing and publicity in contravention of private placement rules.
"Goldman Sachs concluded that the level of media attention might not be consistent with the proper completion of a US private placement under US law. The decision not to proceed in the US was based on the sole judgment of Goldman Sachs and was not required or requested by any other party. We regret the consequences of this decision, but Goldman Sachs believes this is the most prudent path to take," the bank said in a statement.
The move is a major embarrassment to Goldman. Its clients were reportedly told they would have to pay a minimum of $2m to invest and would be prohibited from selling their shares until 2013. The restrictions proved no barrier to the appetite of the bank's US clients. Goldman was flooded with requests for shares.
The move will also be a blow to Facebook. Goldman was reportedly aiming to raise $1.5bn for the company but had received orders for $7bn.
Foreign investors are not covered by the same rules and will still be able to participate in the Facebook offering. Given the level of demand, Goldman will still probably be able to raise the money for Facebook but not from US investors, who will now only be able to invest in Facebook if the company goes public.
While founder Mark Zuckerberg has said a selloff is not a high priority, the appetite for shares may have forced his hand. As part of the private placement, the firm said it would begin reporting its financial results by April 2012, potentially setting the stage for a public stock offering.
The Facebook fiasco comes as US regulators are scrutinising the increasingly hot market in investments in private companies. The Securities and Exchange Commission, the US's financial watchdog, is believed to be investigating activity in Facebook, as well as Groupon, the discount deal website, LinkedIn, the networking site for professionals, and Zygna, makers of the Farmville simulation game.