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, 2012 Johnson Graduate School of Management - TECHNOLOGY Vol. LXXVII Vol. LXXVII TECHNOLOGY - Johnson Graduate School of Management March 12
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, 2012 5
Facebooks IPO: Beginnings
By Steven Fruchter
CLS 13
On January 27,
2012, the Wall
Street Journal
reported that Facebook would likely register with the Securities
and Exchange Commission (SEC) for its initial public offering (IPO)
in the upcoming week. Spokespersons for Facebook and its lead
underwriter Morgan Stanley were unwilling to comment on the
prospective IPO. For years, there had been speculation over when
Facebook would fnally IPO; indeed, it appears this will be the big-
gest Internet initial stock offering to date.
Investors may wonder why a company looking to sell its stock to
the public for the frst time would not publicly announce or adver-
tise it. They may be inclined to believe that the company wishes to
manufacture hype by making the company secretive and diffcult to
access. Though a glamorous notion, this is in fact not the case: the
lack of public information on Facebook`s upcoming IPO is a product
of federal securities laws restricting Facebook and its underwriters
from speaking out at this stage.
The laws here, namely the Securities Act of 1933 (`33 Act) and
the Securities Exchange Act of 1934 (`34 Act), severely constrain
the ability of an issuer (Facebook) or its underwriters (such as Mor-
gan Stanley and Goldman Sachs) from even discussing that an IPO
will occur. Section 5(c) of the `33 Act prohibits the interstate offering
of any security prior to a registration statement being fled with the
SEC. The language of Section 5(c) has been interpreted broadly
by the SEC to include any attempt to condition the public markets`
opinion on the security, including references to an upcoming IPO.
What is the purpose of such seemingly draconian securities laws?
As Section 2 of the `34 Act states, prices of securities "are suscep-
tible to manipulation and control, and the dissemination of such
prices gives rise to excessive speculation, resulting in sudden and
unreasonable fuctuations in the prices of securities." The general
goal of the securities laws is to facilitate the disclosure of relevant
and accurate information to investors at large. In order to ensure
accurate disclosure and deter undue speculation, the SEC has
mandated that a registration requirement precede any sort of IPO
information fow that can potentially affect the value of a security.
Prior to the submission of its registration statement to the SEC,
as a private company, Facebook`s inner workings-including its
business model and fnancial information-were not publicly known.
This all changed when Facebook fled its registration statement
on February 1. Facebook`s statement, fled according to Form S-1
promulgated under the `33 Act, gives an inside look into its revenue
stream as well as certain risk factors.
The SEC has yet to give its stamp of approval to Facebook`s registra-
tion statement, thus stalling the IPO in the "waiting period" of the regis-
tration timetable. Nonetheless, the statement itself is publicly available
to anyone who wishes to access it through the SEC website`s EDGAR
system.
Information in the registration statement includes Facebook`s number
of users (845 million), its revenues for the past fve years, and data on
revenue growth. In theory this data allows the market to determine a rea-
sonable price for Facebook`s initial stock price by allowing criticism and
scrutiny of Facebook`s business model.
Though Facebook may not condition the market in the "waiting pe-
riod" stage, it is not prohibited from developing "soft circles"-contact-
ing potential investors, sending out written communications (following
prospectus regulations), and conducting road shows. The key, however,
is to follow the "waiting period" regulations and statutory language by the
letter; any straying from these strict rules can bring the company into `33
Act violation.