Facebook and the Filed Initial Public Offering - Book Report/Review Example

Facebook and the Filed IPO Facebook recently held one of the largest and most lucrative IPOs (initial public offerings) in the history of publicly traded corporations. The IPO, however, faced immediate criticism and immediate issues. For one thing, it seemed that very few people were actually allowed to buy stock, and those that were seemed to be given special advantages based on relationship with financial institutions or with Facebook itself. This goes against the whole point of an initial public offering, in which the public is supposed to be able to buy stocks at a fair market price, regardless of relationships to financial institutions. The stock also faced serious problems: the initial valuation of the share was $38, a relatively high price which led to this being the highest capitalization of a newly public company in history, at $104 billion (Reuters, 2012). This price, however, seemed overly high, and quickly plunged. The stock closed the week at around $26, and has rarely crossed the $30 threshold since the stock went public, meaning that people who bought at the IPO have lost significant amounts of money. At market rate as of the 24th of July 2012, the stock was valued at $29, meaning that a total of almost $24 billion has been lost since the IPO. The IPO was also mired in technical difficulties, with NASDAQ having significant glitches in the first few hours of the launch that further depressed the ability of people to access the market in a fair and equitable way. All of this has led to a series of unsatisfied investors, some of whom are now suing Facebook, alleging that the company was aware that it was overvaluing its stock and withholding crucial information from investors during the IPO. The case, Brian Roffe Profit Sharing Plan v. Facebook, 12-04081, comes in the way of Facebook updating some of its SEC (Securities and Exchange Comission) filings at the beginning of May, in which the company said that it expected to have to charge advertisers less money, which would thus lead to less revenue (Skillings, 2012). Facebook indicates that this change was mostly prompted by the changing consumer dynamics of people who use Facebook. Rather than visiting the site on their computer, where large screens give ample room to advertisers, more and more users (nearly half as of 2012) are using their mobile devices, which have very limited ad space, to access the website (Skillings, 2012). In the lawsuit, Brian Roffe Profit Sharing Plan argues that these revenue forecasts were selectively disclosed to a few select business clients by both Facebook and its major underwriters such as Morgan Stanley, without being disclosed to the public investment community at large (Skillings, 2012). This would mean that those clients and investors knew not to buy Facebook stock at its inflated price, but rather should wait until it falls to a level that is more in line with the updated revenue forecasts they supposedly had access to. These allegations are largely based on news reports which indicated that Facebook insiders had told those news organizations that poor revenue forecasts were communicated to the largest and most important Facebook investors, but not to others (Skillings, 2012). This essentially amounts to insider trading (Szockyg & Gilbet, 2002). There are several things that the management could have done to avoid the lawsuit, but the problem is that the management might have felt that the risk of a lawsuit was worth the actions they took. The first of these options would simply have been to release the most up to date revenue information available at the time of the IPO, rather than waiting for a few months until SEC filings were due. The fact is that this was a large-scale market movement, and Facebook would certainly have had to be aware that more of their users were coming in on mobile markets well before they actually released the SEC filings, as such large-scale market movements obviously do not develop in a short period of time (Kozinets, Robert, & Handleman, 2004). Then, they could have priced their stock at a more reasonable place to ensure that the bottom would not fall out of the market very quickly after the release of the stock in the IPO. This would probably actually have garnered them more money in the short and the long terms: the Google IPO was a success largely because of branding and hope, regardless of revenue streams (Fleischer, 2006). If the company was unwilling to do this, it still could have managed its risk better by ensuring that no preferential treatment of any kind was even construed: there should have been strict controls of who knew what about revenue streams, and every effort should have been taken to ensure that this information did not get to anyone if it was not going to be made publicly available. The basic underlying ethical considerations of this case are fairly simple. In a free market, everyone must be working under the same set of knowledge, and with anything else you will essentially have some people swindling others because they know how the market will turn early. This is why laws exist to prevent insider trading, as insiders will have greater knowledge of how the market will move than anyone else (Keenan, 2012). If these allegations prove true, Facebook might also be facing fraud charges, based on the fact that its SEC filings prior to the release of the stock in the IPO should have had the updated revenue projections and did not. The caselaw for this case will be relatively open and shut: if Facebook released preferential information, and especially if, as alleged, they did not disclose information they should have in their initial Registration Statement with the Securities and Exchange Commission, it will simply be a case of fraud. The case law for this kind of charge is almost too broad to speak of, but an interesting case to look at would be Brodsky v. Yahoo Inc, 2009, which was a similar case of revenue fraud. The judge in the case threw the case out, because of the difficulty in proving the accusations: the fact is that most of the low-level employees who would be willing to testify to anything simply did not know enough about the case to be able to argue about it. So, while the case law is relatively simple, proving the allegations could be incredibly difficult. Facebook faces very few alternatives to finishing this in court. One of the issues is that there have been multiple law suits all amalgamated into a single one, which represents many, many smaller investors who charge that Facebook was, at very least, not forthright about its IPO. A settlement would thus probably be prohibitively expensive, especially considering the losses sought would be approximately the $15 per share that the stock seemed to be valued over market prices. If Facebook and its backers such as Goldman Sachs believe there is any truth to these allegations, they still might attempt a settlement approach, but only once it becomes clear that their legal options are waning and they are in danger of losing the case. Facebook’s IPO was not the resounding success many have come to expect from the largest tech companies going public. The fact is, Facebook and its backers seemed to have drastically overvalued the market value of the company, and this has led to a great deal of disgruntled investors. These investors are now seeking damages from the company, which will at very least hurt brand appeal, and at worst could cost them significant amounts of money. References Fleischer, V. (2006). CASE STUDY: BRANDING THE GOOGLE IPO. Financier, 13/14, 38. Keenan, M. G. (2000). INSIDER TRADING, MARKET EFFICIENCY, BUSINESS ETHICS AND EXTERNAL REGULATION. Critical Perspectives on Accounting, 11(1), 71-96. Kozinets, R. V., & Handelman, J. M. (2004). Adversaries of consumption: Consumer movements, activism, and ideology. Journal of Consumer Research, 31(3), 691-704. Skillings, J. (2012, May 23). Facebook, Zuckerberg sued over IPO. CNET NEWS. Retrieved from news.cnet.com/facebook-zuckerberg-sued/ Szockyj, E., & Geis, G. (2002). Insider trading. Journal of Criminal Justice, 30(4), 273-286. Read More