Facebook executives have fallen silent. Having filed paperwork on Feb. 1 with the Securities and Exchange Commission to raise $5 billion in an initial public offering, the social network site is now in a “quiet period” where federal rules limit what company executives can say in public.
Behind the scenes, it’s a different story. The Menlo Park (Calif.)-based company is just beginning a months-long slog that involves appeasing regulators, wooing investors, and dealing with endless amounts of paperwork. While it will follow a familiar pattern, this is no routine deal, what with the epic media attention (and possible $100 billion market valuation) a Facebook offering will attract. “When you’re doing one of these offerings that’s high-profile, you know that you’re under a microscope,” says Martin Wellington, a partner at Davis Polk & Wardwell who worked on the Pandora IPO. “In addition to SEC scrutiny, you expect there will be a high degree of interest from the press, the blogosphere, and the investment community. Everyone working on the deal is going to be particularly careful.”
Here’s a look at what probably lies ahead for Facebook, based on interviews with regulators and people involved in previous Silicon Valley IPOs. Spokesmen for Facebook and Morgan Stanley (MS), Facebook’s lead banker, declined to comment.
When Facebook’s S-1 filing landed in the SEC’s computers, it made its way to the Division of Corporation Finance and the desks of a lawyer and an accountant who specialize in the industry. These staffers will go through the document page by page, noting anything that might mislead potential investors, need more supporting evidence, or warrant further explanation. They bring their recommendations to a more senior lawyer and accountant who complete the SEC’s first “comment letter,” which typically lays out 50 to 100 queries that the company must address. An agency spokesman declined to discuss the Facebook IPO.
When Facebook’s S-1 filing landed in the SEC’s computers, it made its way to the Division of Corporation Finance and the desks of a lawyer and an accountant who specialize in the industry. These staffers will go through the document page by page, noting anything that might mislead potential investors, need more supporting evidence, or warrant further explanation. They bring their recommendations to a more senior lawyer and accountant who complete the SEC’s first “comment letter,” which typically lays out 50 to 100 queries that the company must address. An agency spokesman declined to discuss the Facebook IPO.
The SEC may challenge various aspects of the filing. It asked LinkedIn (LNKD) how it could back up its claim to be “the world’s largest professional network on the Internet.” It queried Zillow (Z) on how the real estate website ensures it’s not double-counting users who access it both online and on mobile apps. It told Zynga (ZNGA) that a graphic at the beginning of its filing, which showed the number of users, “should not be used to present only the most favorable aspects of its business” and asked why it hadn’t mentioned more prominently that “the vast majority” of users play its games for free.
Questions about how companies track and count their users have come up in several recent Internet IPOs. The issue could arise with Facebook, which boasts 845 million “active monthly users,” though that number includes people who don’t visit Facebook’s main site and instead interact with the social network through partner sites.
Questions about how companies track and count their users have come up in several recent Internet IPOs. The issue could arise with Facebook, which boasts 845 million “active monthly users,” though that number includes people who don’t visit Facebook’s main site and instead interact with the social network through partner sites.
The regulators also scrutinize corporate governance and accounting policies. Groupon (GRPN) diverged from standard accounting methods and didn’t include the costs of online marketing when calculating its operating income. Eventually the SEC forced it to restate its financials. “Don’t mess with the SEC” is the lesson Seth Priebatsch, chief executive officer of SCVNGR, a Groupon competitor, told Bloomberg Businessweek at the time.
The agency told buyout firm Carlyle Group that it wouldn’t approve its IPO unless the private equity firm abandoned provisions that banned shareholders from filing class actions. On Feb. 3, Carlyle capitulated. One issue that may come up in the Facebook review is the power that founder and CEO Mark Zuckerberg, 27, will have once the company is public—a question that’s already been raised by the second-largest U.S. pension fund, California State Teachers’ Retirement System. Zuckerberg will control 56.9 percent of voting rights at the social network under the terms of the current filing.
The agency told buyout firm Carlyle Group that it wouldn’t approve its IPO unless the private equity firm abandoned provisions that banned shareholders from filing class actions. On Feb. 3, Carlyle capitulated. One issue that may come up in the Facebook review is the power that founder and CEO Mark Zuckerberg, 27, will have once the company is public—a question that’s already been raised by the second-largest U.S. pension fund, California State Teachers’ Retirement System. Zuckerberg will control 56.9 percent of voting rights at the social network under the terms of the current filing.
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