- U.S. Securities and Exchange Commission had to fight Facebook on 92 queries it had regarding plans for its May 2012 IPO which it filed on February 1st
- Correspondence between the SEC and Facebook show that Facebook was unable or unwilling to share details of its business plan with the Federal Agency
By James Nye
PUBLISHED:15:24 EST, 10 October 2012| UPDATED:17:22 EST, 10 October 2012
Facebook was caught out providing U.S. Securities and Exchange Commission officials inaccurate and inflated estimates of the number of its users and ultimately its worth just a week before the company’s disastrous IPO, it emerged today.
A flurry of 12 letters between the U.S. Securities and Exchange Commission (SEC) and Facebook depict a reluctant management team repeatedly playing cat-and-mouse over official requests to release figures and in the end being forced to withdraw information that was in reality guess work at best.
Most damning is the suspicion that Facebook did not have accurate figures for the number of smartphone users who use its application and intentionally held back the real, significantly lower figures, until only a week before the $104 billion IPO on May 18th.
Amateurish: Facebook CEO Mark Zuckerberg speaks to the TechCrunch Disrupt SF 2012 conference on September 11, 2012 in San Francisco
This information has come to light after the dozen letters dating from February 1st through to May 17th, were published on the SEC’s website 20 days after the company’s initial public offering.
The contentious exchanges were over Facebook’s apparent failure to disclose the exact figures for mobile phone user growth, where they were geographically located, and how it planned to make money from them.
This has led some analysts to conclude that Facebook knew their valuation and business plan wasn’t watertight before launching at $38 a share and that the company should have postponed the public offer.
‘They were given the benefit of the doubt when they went public that they were ready for prime time,’ said Michael Pachter, a managing director at Wedbush Securities Inc.
‘They still haven’t proved that they are.’
In the initial IPO filing from February 1st, the company said smartphone usage of Facebook increased around the world and numbered 425 million ‘monthly active users’ in December 2011.
It accepted that it hadn’t proven it could ‘monetise’ individuals using only mobile devices, where the absence of ads may ‘negatively affect our revenue and financial results.’
The SEC asked for a ‘more detailed’ analysis of these key challenges requesting to see the company’s plan B should their attempts to corner the mobile market fail – an eventuality which the SEC described as being ‘disastrous.’
Replying on March 7th, Facebook’s lawyer Jeffrey Vetter disclosed that Facebook’s mobile monetisation strategy could run up ‘excessive expenses’ but still refused to number the users who ‘primarily accessed’ Facebook through their smartphone, saying they didn’t have a ‘reliable’ count.
Disastrous IPO: Facebook CEO Mark Zuckerberg speaks to the TechCrunch Disrupt conference four months after the firm’s shambolic share offering
When asked by the SEC to locate geographically its users it said that it couldn’t do so reliably, because for instance Facebook counted most BlackBerry owners as Canadian because their servers are based in Canada.
This prompted the SEC to question whether Facebook actually had 845 million individual users at the start of 2012 which the firm replied they believed was ‘reasonably accurate.’
They reveal a volley of messages between the commission, Facebook’s Chief Financial Officer David Ebersman and their law firm Fenwick & West LLP and show that Facebook was aware of many of the issues currently unnerving investors.
Central to these correspondence were the claims that Facebook made on February 1st that their mobile figures were backed by audience share accounting firm Nielsen and highlighted their ability to utlilise the burgeoning smartphone market – on which advertisement’s are not as easily viewed as on a home computer or laptop.
The U.S. Securities and Exchange Commission had to fight Facebook tooth and nail on 92 points of information it wanted to see ahead of its May 2012 IPO
Barbara Jacobs, an assistant director for corporation finance at the SEC was skeptical that Facebook could deliver on these claims and questioned where they had drawn their figures from after the Internet company cited respected Nielsen as their source.
After an ultimatum for Facebook to produce a Nielsen backed study, the social networking firm dropped the reference and admitted the claim was drawn from marketing materials only and subsequently ceased to mention them on February 28th – 27 days after it filed its proposal to go public.
Bloomberg News has trawled through the letters and correspondence and noted they show Facebook executives holding back crucial details which are only revealed when the SEC pushes for their disclosure.
In one exchange, the SEC notes that Facebook in some cases was counting mobile users twice and Jacobs wrote on March 22nd, ‘Please explain to us how you determined that your metrics are not overstated?’
Fallen since May: Today’s Facebook share – which is around 45 percent down on the $38 dollars it opened at in May
Furthermore, on May 9th, eight says before the IPO, Facebook finally made clear to the SEC that daily mobile customers were increasing faster than the advertising revenue growth – thereby revealing a shortfall in the expectations of the much vaunted and imminent IPO.
Even though the exchanges are now months old, the issue is more relevant now than before, as the Menlo Park, California based firm how counts one billion users worldwide.
This is up from 845 million at the year’s start and of which the firm claims 600 million access Facebook through their mobile device.
Since their disastrous IPO, Facebook has dropped to almost a half of its offering price, amid concerns over its ability to monetise the growing mobile market.
Faceplant: Mark Zuckerberg on May 18th – the day of the Facebook IPO
Other’s are just as critical.
‘We’ve been growing increasingly skeptical of some of their monetisation methods,’ said Richard Greenfield, an analyst at BTIG Research to Bloomberg Television.
What investors who bought up Facebook shares in May did not have a chance to see until a month after the IPO were requests from the SEC that pushed Facebook to disclose how they planned to deal with challenges they faced such as decelerating revenue growth, user count and its growing dependency to online gaming firm Zynga Inc.
Current SEC policy is to not release any messages regarding IPO’s until 20 days after the share float.
However, the revelations that Facebook itself was unsure of its own figures and busines plan has led industry experts to question why the IPO occurred at all.
‘When you have a significant change in your forecasts it’s good business practice to postpone the IPO so that the market has more time to understand what’s going on,’ said Luigi Zingales, a finance professor at the University of Chicago’s Booth School of Business.
Indeed, following the depth of the bungled IPO, the SEC is continuing to probe an ‘in depth review of all the participants’ in the IPO said SEC Chairman Mary Shapiro in an interview in September.
Cleaning up: Facebook’s IPO has caused a mess that is currently being investigated by the Senate Banking Committee, two regulatory agencies and the state of Massachusetts
The Senate Banking Committee is also looking into the matter, and has held meetings “with a range of involved parties including Facebook, Nasdaq, Morgan Stanley (MS), and the SEC,” said Sam Gilford, press secretary for the Senate committee, in an e- mailed statement to Bloomberg News.
So, while questions may be asked as to why the SEC allowed the Facebook IPO to go ahead, even with concerns, the heart of the matter is growing concern within the SEC over how it audits new high-tech consumer internet firms.
Among the 92 of concern that the SEC brought to Facebook was the social networking giants reliance on Zynga, which makes the five most popular games played on Facebook, including ‘Texas HoldEm Poker.’
At first Facebook told the SEC that Zynga accounted for 12-percent of its 2011 revenue but after deeper questioning admitted that Facebook made almost one fifth of its revenue through Zynga.
In addition, the SEC had to force Facebook to admit that Zynga could end up becoming a competitor.
‘Zynga may choose to try to migrate users from existing Facebook-integrated games to other websites or platforms,’ Facebook disclosed.
Hyped: The Facebook IPO was one of the most widely-anticipated stock offers in recent history
As a result, ‘Our financial results may be adversely affected,’ it said.
All answers to the SEC from Facebook were signed by Jeffrey Vetter, 46, of the Mountain View, California, law firm Fenwick & West. He declined to comment.
The SEC also asked Facebook why it hadn’t included data on revenue generated by each user, a ‘key’ indicator of performance.
Vetter dismissed the request on March 7, saying that the company prefers to look at ‘overall growth in users’ and ‘overall revenue in evaluating the business.’
Undeterred, the SEC carried out their own calculations, which made Facebook file the required figures.
These showed revenue worldwide from each active user falling to $1.21 in the fourth quarter of 2012 from $1.38 in the fourth.
They also revealed that per-user revenue was lowest in Asia, at just 53 cents down from 56 cents in the first quarter.
Company executives did little to help their cause among shareholders during Facebook’s first months as a newly public company according to financial experts.
‘There should be more public appearances by the CEO, there should be ongoing media relations activities that help give confidence to investors,’ said Paul Argenti a professor at Dartmouth College’s Tuck School of Business in Hanover, New Hampshire.
‘I don’t see any of that going on. I see the exact opposite. It’s amateurish.’
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