SEC Also Unsuccessfully Pushed Facebook to Clearly "Quantify" Damage from Mobile Sudden Shift; Many SEC Requests Met With Minimalist S-1 Disclosures By Facebook As Sides Felt Pressured Not to Slow May 18 Timing, Which Would Risk Revealing Facebook's Weak 2nd Quarter
Facebook's SEC Correspondence Letters show a late push to meet the May 18th IPO date.
June 15, 2012 4:30pm EST New York, NY – A series of new SEC filings released just hours ago document the extensive scope of SEC questioning Facebook (NASDAQ: FB) received prior to its IPO. And nearly every SEC request - sometimes couched by SEC attorneys as "strong encouragement" or advice for Facebook's own legal protection - were usually met by Facebook with a bare minimum amendment or a brief disclosure in its S-1 in response to the extensive SEC inquiries.
In a series of eight total “correspondence letters” between Facebook and the SEC (in addition to several conference calls among SEC and Facebook lawyers), questions were raised surrounding Facebook’s reliance on Zynga (NASDAQ: ZNGA) for revenue, Mark Zuckerberg’s control of the company, last minute acquisitions of Instagram and Microsoft patents, quanitifying the impact on Facebook's financials from the mobile-device shift, and repeated SEC requests for more user metrics, many of which were rebuffed by Facebook. (The letters also allude to additional telephone conference calls on the matters.)
The exchange of SEC correspondence letters is standard in the IPO process. But what is notable, however, is that the Facebook - SEC letters reveal Facebook's last-minute scramble to complete its IPO by May 18, and the SEC trying to accomodate Facebook's timing while at the same time largely unsuccessfully pressing for greater transparency by Facebook before finally relenting under pressure by Facebook to allow the company to hit its preferred IPO date, time to occur without disclosing Facbeook's (weaker) second quarter financials.
PrivCo breaks down the major takeaways from the newly released SEC correspondence letters:
- Mobile: In the February 28, 2012 Correspondence Letter, the SEC asked Facebook the consequences of more users accessing the site via mobile devices rather than computers, stating:
“Assuming that the trend towards mobile continues and your mobile monetization efforts are unsuccessful, ensure that your disclosure fully addresses the potential consequences to your revenue and financial results rather than just stating that they “may be negatively affected.”
- After a back and forth in which the SEC demanded greater clarity regarding mobile, Facebook filed its May 9 S-1 amendment admitting that the number of users logging in on mobile devices was growing faster than revenue, largely because Facebook showed relatively fewer ads on mobile devices.
- Zynga Revenue Reliance: In the April 10th letter, the SEC demanded that Facebook clarify its revenue dependence on Zynga was 19%, not 12%, using the following language:
“Please disclose that revenue from ads shown to users using Zynga apps on Facebook was approximately 7% of your revenue for 2011, and that this is in addition to the 12% of your 2011 revenue derived from payments processing fees related to Zynga’s sale of virtual goods and direct advertising purchased by Zynga.”
- Zuckerberg Control: In the February 28th letter, the SEC demanded information regarding Zuckerberg’s post-IPO control of Facebook and his ability to designate a successor, stating:
“Please more fully explain how the risk of Mr. Zuckerberg‟s control affects you and the Class A common stockholders on a short-term and long-term basis.”
- Last-Minute Acquisitions: In the May 1st letter, the SEC requested clarification regarding Facebook’s last-minute acquisitions of Instagram and certain AOL patents, asking for the following:
“Please describe the nature of the AOL patents and patent applications acquired from Microsoft.”
“Please disclose the estimated financial effects of the April 2012 nonrecognized subsequent events.”
- Ernst & Young: The correspondence also reveals a last minute inquiry regarding the non-auditing work that Facebook’s auditor E&Y had done. This request came on the heels of E&Y’s failure to discover “material deficiencies in accounting controls” at Groupon, and having signed off on Groupon's later dramatically revised accounting in its IPO filing.
- Facebook replied on May 14, stating:
“In the three years prior to the Company’s initial filing of its Form S-1, the Company and EY have taken steps to evaluate, consider and conclude that services requested or provided are consistent with EY’s independence.”
Overall, the SEC correspondence letters show a serious push by Facebook to release the IPO on time. Last minute conference calls and overnighted correspondence were occurring between both sides just days before the widely-hyped May 18th IPO, as media pressure was building on both sides to hit the big date. At the same time Facebook and the SEC were negotiating on language, Facebook insiders apparently knew that with their 2nd quarter financials coming in weak, and they could not risk the IPO timing further by making more than bare minimum new disclosures or S-1 amendments, despite being pointedly pressed to do so by SEC attorneys.
In the final correspondence on May 15th, Facebook’s lawyers formally demanded the IPO be "declared effective," and with the May 18 timing looming, the SEC apparently accepted the final May 14th responses without further revision.
“Ultimately the SEC let Facebook slide with what PrivCo feels was less than full and complete disclosure on the adverse impact on Facebook’s business from the rapid shift to mobile-device access of Facebook, as well as on 'before and after' finances stemming from its two late pre-IPO acquisitions,” said PrivCo CEO & Founder Sam Hamadeh in a statement. "Facebook's decision at each opportunity to say the bare minimum at each opportunity that could be accepted by the SEC on one hand, while allegedly providing greater quantified details to its underwriters, their analysts, and select institutional buyers is a decision that may well come back to haunt Facebook as IPO-related securities lawsuits progress."
Hamadeh added, “The subjects and dates of the correspondences offer proof that the ill-timed acquisitions added at least a two week delay to the IPO process. During two-week delay, the European debt crisis worsened and General Motors very publicly cancelled its Facebook ad package, which as we know now certainly have not helped Facebook stock.”
In related Facebook news, Facebook Chief Technology Officer Bret Taylor is leaving later this summer to work on an undetermined start-up. The move comes amid continued intense media and investor scrutiny following the social-networking company's rocky IPO.
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