The initial public offering of Facebook stock in May, 2012, sent shivers of excitement through investors. The IPO was the biggest in social media history and among the biggest of all time, raising more than $16 billion through the sale of 461 million shares of stock.
Within three months of open trading, the vaunted stock lost half of its value.
What happened and why was the focus of “Pre IPO Issuer Disclosure...Post Facebook,” a talk at the Columbus School of Law on Oct. 24 by Philip Shaikun (above), associate general counsel with the Financial Industry Regulatory Authority (FINRA).
Invited to speak by the Securities Law Program, Shaikun said that Facebook was that rare public offering; the subject of so much media buzz that every investor wanted a piece of the action, whether they really respected what the company represented or not.
“Facebook is like Krispy Kreme doughnuts. People like the product, if not the model that produces it,” observed Shaikun.
So high was the anticipation surrounding the cultural touchstone’s IPO that key aspects of it were mishandled, and few seemed to notice or care, according to Shaikun.
For example, stock analysts selectively disclosed information about Facebook to prospective investors, and the disclosure statements were not detailed enough.
The IPO’s underwriter, Morgan Stanley, is facing litigation over claims that it knew that Facebook earnings estimates were overstated but that the information was revealed only to key institutional investors. Public investors were mostly unaware and paid higher initial stock prices than were justified. Some Facebook executives have been accused of alerting industry insiders to Facebook's earnings before they were public.
“There’s a lot about this that one might see as being, if not illegal, at least unfair,” Shaikun said.
NASDAQ, the exchange handling the trading of Facebook shares, complicated things by suffering a computer malfunction during the first hours of the IPO, leading to tens of millions of dollars in trades being wrongly placed.
The entire botched operation merits a closer look at how future huge offerings are handled, said Professor David Lipton, director of Catholic University’s Securities Law Program.
“The Facebook debacle raises a gaggle of questions - What are you allowed to say, and what must you say pre-IPO?” he asked.