Facebook $FB withheld vital info from investors pre/post IPO regarding mobile...
When Facebook Inc. (FB) filed its proposal Feb. 1 to go public, it touted the effectiveness of ads linked to customers' friends, citing research from Nielsen, the audience-counting company.
Barbara Jacobs, an assistant director for corporation finance at the U.S. Securities and Exchange Commission, was skeptical, as she and her staff vetted the filing to ensure Facebook had disclosed all material information to investors. The claim appeared to be drawn from marketing materials, not a Nielsen study, she wrote to Chief Financial Officer David Ebersman, 42.
She gave him an ultimatum: Produce the study and provide Nielsen's consent for use of the data -- or don't use it, she wrote to Ebersman on Feb. 28. Facebook dropped the reference after initial resistance.
The incident was part of a two-and-a-half-month volley of messages among SEC officials, Ebersman and Facebook's law firm Fenwick & West LLP. A dozen letters, published a month after the May 17 IPO on the SEC's website, depict a management team hesitant to disclose information and still guessing at even rudimentary aspects of its business just weeks before the company held the largest-ever technology initial public offering. Many of the issues raised by the SEC and now unnerving investors were foreshadowed in the then-private correspondence between the SEC and Facebook.
"They were given the benefit of the doubt when they went public that they were ready for prime time," said Michael Pachter, a managing director at Wedbush Securities Inc. "They still haven't proved that they are."
On the most critical issue facing Facebook's future as a public company -- whether it could make money from the soaring number of mobile users, who see fewer ads than other customers - - the letters show executives holding back crucial details until the SEC pushed for further disclosure.
Noting that Facebook was counting some mobile users twice, Jacobs wrote on March 22: "Please explain to us how you determined that your metrics are not overstated."
Only eight days before the IPO, on May 9, did Facebook make clear in a filing that that daily mobile customers were increasing faster than advertising growth, potentially hurting revenue and profits. It was the strongest public signal that the IPO could fall short of its high expectations.
The issue of mobile users is even more relevant today as Facebook, based in Menlo Park, California, announced on Oct. 4 it now counted one billion users worldwide, up from 845 million at the year's start. More than half of them, or 600 million, access Facebook through a mobile device, a number that grew 41 percent this year.