Facebook Fought SEC to Keep Mobile Risks Hidden

In the run-up to its IPO, the social networking company wrestled with the SEC over disclosures.

When Facebook Inc. filed its proposal Feb. 1 to go public, it touted the effectiveness of ads linked to customers’ friends, citing research from Nielsen, the audience-counting company.

Barbara Jacobs, an assistant director for corporation finance at the U.S. Securities and Exchange Commission, was skeptical, as she and her staff vetted the filing to ensure Facebook had disclosed all material information to investors. The claim appeared to be drawn from marketing materials, not a Nielsen study, she wrote to Chief Financial Officer David Ebersman, 42.

‘Increasingly Skeptical’

“We’ve been growing increasingly skeptical of some of their monetization methods,” Richard Greenfield, an analyst at BTIG Research, told Bloomberg Television on Oct. 8, referring to Facebook’s struggles to get revenue from mobile users. He cut his rating on the shares to sell.

SEC Correspondence

What investors didn’t see until a month after the IPO were the letters that pushed Facebook to disclose in detail such key financial challenges as decelerating revenue growth, user count and its dependence on gaming company Zynga Inc. -- all issues that arose in prominence after it became a public company.

Month’s Salary

Ryan Cefalu, a 34-year-old data-systems manager and father of two in Baton Rouge, Louisiana, said he bought about $4,000, or about a month’s salary, in Facebook stock and has lost about $2,050 on paper.

Stock ‘Hysteria’

Facebook trading on secondary market-maker SecondMarket Inc. suggested a market cap of $85 billion in July 2011, seven months before Facebook disclosed on Feb. 1 that it planned a share sale.

Zynga Questions

Facebook’s responses were signed by Jeffrey Vetter, 46, of the Mountain View, California, law firm Fenwick & West. He declined to comment. Vetter, who joined Fenwick in 1995, has also helped prepare public offerings for companies including Fusion-io Inc. and Jive Software Inc.

Revenue Details

Jacobs 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.”

Mobile-Only

Jacobs asked for the impact on revenue of greater mobile use, only to be told by Vetter that Facebook couldn’t “specifically assess the impact” as those users may also be using personal computers to get onto Facebook. When asked how many new users were mobile only, he estimated that 69 million, or 44 percent, of the 156 million new users might be mobile- only.

Market ‘Mistrust’

Still, said finance professor Zingales, “The fact that some institutional investors got access to a company’s information that was not available to ordinary investors creates the perception that there are two sets of rules and increases the mistrust in the market.”

Including Users

Yet Facebook wanted the larger retail allocation to let its users take part in the IPO, the person said. In the end, 25 percent of the shares sold at the IPO were allocated to retail investors, other people have said. That exceeds the average amount of 15 percent.

‘Amateurish’ Approach

“There should be more public appearances by the CEO, there should be ongoing media relations activities that help give confidence to investors,” Argenti said. “I don’t see any of that going on. I see the exact opposite. It’s amateurish.”

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