The following editorial appeared in the Los Angeles Times on May 24:
It’s not entirely clear why Facebook went public. Investors and employees who owned a share of the company’s equity could sell it on private markets, and the company’s prospectus stated that it had no pressing need for the funds. The nearly $7 billion it raised will be socked away along with almost $4 billion in cash reserves. The more obvious winners in the IPO were the venture capital firms and other early investors who cashed out a portion of their holdings; they collected more than $9 billion.
But early buyers of the new stock paid up to $42 per share, only to see the value plummet before recovering slightly on Wednesday. Reports soon emerged that one or more of the banks underwriting the IPO had lowered their estimates of Facebook’s expected earnings, and had shared these warnings with some of their clients. The implication is that some large investors knew enough to stay away from the IPO, or to sell their holdings quickly to buyers who weren’t privy to the latest analysis.
Facebook and Morgan Stanley, the lead underwriter of the IPO, deny that they did anything wrong or even unusual. And although the underwriters’ lower estimates weren’t made available to the public, the financial media caught wind of the warnings and reported on them before the stock went on sale. In fact, much of the coverage leading up to the IPO was negative, with plenty of skepticism expressed about the company’s revenues ever being large enough to justify the stock’s price.
There is a difference, however, between the information that gets bruited about in the media and what companies and their underwriters officially disclose. If insiders disclose information that’s significant enough to influence investors, securities law requires that they share it with everyone, not just a favored few. That’s why regulators should find out exactly what Facebook said to its underwriters that led to their revised estimates, and whether those banks revealed information to a few that should have been disclosed to all.
Ultimately, Facebook’s share price will rise or fall with the company’s ability to mine its enormous user base for significantly more revenue than it does today. In the meantime, though, regulators should make sure that those who choose to bet on the company have the same information as everyone else at the table.