Before Facebook went public, you couldn’t go anywhere in the Valley without hearing someone excitedly talking about how big the IPO was going to be.  However, the much-anticipated IPO on May 18 produced share prices much lower than most people had expected.  Perhaps even more surprisingly, the IPO led to a spate of class action lawsuits in which Facebook shareholders are claiming that Facebook violated federal securities laws and regulations and lied about Facebook’s growth and earnings potential.

Facebook announced its intention to go public on February 1 and filed an initial registration statement with the Securities and Exchange Commission (SEC).  Then it went on a “road show” where it briefed potential investors about Facebook’s revenue and usership growth trends.  During the road show period, Facebook claimed that its revenue growth was positive since 2010 and that the metrics it uses to measure its usership were all trending upward.

At issue is in the lawsuits is an apparent disconnect between the information Facebook was issuing to potential investors during its road show period and what was being told to its underwriters.  The plaintiffs claim that Facebook was, at that time, experiencing a severe and pronounced reduction in revenue growth as a result of people accessing Facebook through mobile devices, and that several of the underwriters were informed of the true facts. Furthermore, they allege that these underwriters reduced their earnings forecasts as a result of this information, and that Facebook and its underwriters only shared this information with preferred investors.  The plaintiffs also allege that, as a result of this information coming out from various news outlets, the value of the stock has dropped even further, and that altogether investors have lost more than $4.5 billion due to the defendants’ SEC violations.

No matter how the lawsuits turn out, the Facebook flop has dampened enthusiasm for both Facebook and IPOs.  Investors now agree that Facebook may not be worth as much as Amazon, or half as much as Google.  No company has gone public since May 18, and fourteen offerings have been withdrawn or delayed.  When it comes to the Facebook IPO, the reality just couldn’t live up to the dream.

- Claire Kalia


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