SEC Pressed Facebook to Disclose More
June 16, 2012 (The Pantagraph Bloomington, IL) SAN FRANCISCO - Questions posed to Facebook Inc. by federal regulators before its initial public offering echo investor concerns that the company didn't disclose enough information about its business before its controversial initial public offering.
But a month after the controversial IPO, Facebook is pushing back, arguing that it made public all material information and followed the rules. The company on Friday asked a federal court in New York to consolidate more than 40 IPO-related lawsuits.
The legal motion was filed on behalf of Facebook, Chief Executive Mark Zuckerberg, the company's board members and its chief underwriters, Morgan Stanley and Goldman Sachs.
The filing argued that the "Southern District of New York as the most appropriate, convenient and efficient forum to centralize pretrial proceedings in the civil litigation concerning the IPO."
Some of the concerns reflected in the complaints are amplified in letters sent to Facebook by the U.S. Securities and Exchange Commission showing the agency pushing for more disclosures on Facebook's business, citing "disproportionate trends" in its revenue per user and the potential impact of its increasing mobile user base.
The letters were sent before the company's IPO on May 18, but made public only this week. An SEC spokesperson said it typically takes about 20 days or more after letters are filed for communications related to an inquiry to be made publicly available.
The correspondence focused on Facebook's disclosures on business trends, particularly involving its revenue stream. Facebook makes most of its money through online display advertising, mainly through PCs.
Analysts have noted that one of the company's key problems is how to enhance its ability to make money from mobile devices, such as smartphones and tablets.
In its IPO filings, Facebook repeatedly said that its ability to make money from the mobile market was "unproven."
But in the letters, the SEC apparently wanted the company to elaborate.
In a March 22 letter, the agency asked about Facebook's mobile presence, pressing the company to disclose "any material trends" in that space.
The agency asked, "Are your MAUs (monthly active users) increasing as a percentage of your MAUs in particular regions where use of personal computers is less prevalent?"
The SEC also asked about overall trends related to Facebook's growing user base and the rate at which it's been able to monetize that user base.
In an April 10 letter, the agency noted that for December 2010 and December 2011, "average revenue per user in the U.S. and Canada and Europe regions was significantly higher than the other geographic regions, and average revenue per user in Asia and the rest of world appears to be driving down average revenue per user worldwide."
The SEC letter indicated that Facebook responded to questions on user trends by saying it does "not rely' or focus' on calculations of average revenue per MAU (monthly active user)."
But the agency stressed that Facebook is required to disclose "description of any known trends or uncertainties that have had, or you reasonably expect will have, a material impact on operations."
"Please explain further why you do not believe disclosing these disproportionate trends in average revenue per user, or any other trends or factors, would be material information for investors to understand your ability to monetize users, specific to each geographic region," the SEC letter asked.
In fact, Facebook offered more color about its business in an amended filing on May 9, just nine days before its IPO.
In the amendment, Facebook noted "an increased usage of Facebook on mobile devices." The company said it believed the trend "has contributed to the recent trend of our daily active users increasing more rapidly than the increase in the number of ads delivered."
That revision, in fact, prompted some analysts, including those affiliated with the IPO underwriters, to trim revenue estimates for Facebook.
That later triggered allegations, reflected in that lawsuits, that Facebook and its underwriters misled investors.
Facebook has rejected the allegations.
In requesting a consolidation of the lawsuits, the company said Facebook and its underwriters "followed customary practices and did not violate any rules."
Facebook argued that its May 9 amendment in which the company "warned about the negative impact" of its rising mobile user base "received prompt and extensive media coverage."
Furthermore, Facebook also argued that it is not required to disclose all forms of communications related to its IPO.
The company quoted an SEC rule that said, "Oral communications of an issuer made in connection with a registered offering after the registration statement is filed will continue not to be subject to any filing or public disclosure requirements."
A Facebook spokesperson said it's unclear when a judge in the Southern District of New York court will rule on its consolidation motion.