BizTech Law Blog
Technology IPOs used to be the norm in the IPO cycle, and when Facebook announced an IPO many investors could not contain the excitement. But less than expected stock results have caused investors to file suit against Facebook and the underwriters of the IPO.
Source: Chart image from Yahoo! Finance
Facebook, along with Morgan Stanley, JP Morgan Chase, and Goldman Sachs, are seeking the dismissal of claims made by investors in connection to the company's IPO. The claims allege misrepresentations by Facebook and its underwriting banks that violated the Securities Act of 1933 and the Exchange Act of 1934. Essentially, the investors claim that Facebook disclosed certain information to the underwriting banks that it did not disclose to investors.
Both the Securities Act and the Exchange Act are disclosure-driven statutes that attempt to regulate securities by creating transparency rather than evaluating the quality of every possible investment. One important caveat to the Acts is that the company's underwriters can be found liable as well. Facebook's investors allege that the company provided its underwriters with certain projections regarding its future revenue stream that it did not provide to investors, resulting in a violation of both acts.
One of the biggest issues in contention is whether Facebook sufficiently disclosed the projected impact of mobile devices on its revenue. The plaintiffs contend that Facebook materially omitted these projections from its disclosures. Facebook, on the other hand, argues that it was not required to disclose those projections to investors. According to the brief of Facebook and its underwriters, the projections and internal calculations that were not disclosed were speculative and would have interfered with the IPO. Therefore, disclosure of the calculations was not required.
Facebook further maintains that it made broad disclosures to investors prior to the IPO that were sufficient under the Acts. Examples of these disclosures include statements warning investors that the company's growth rate was unsustainable, a warning that increased mobile access to Facebook may decrease ad revenue, and substantial media coverage related to the impact of mobile devices on the company's revenue. Whether or not these broad statements will be sufficient for a judge remains to be seen.
