The Dilemma With Facebook and IPO Rules

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The Dilemma With Facebook and IPO RulesThe hoopla surrounding the May 18, 2012 Facebook IPO has come and gone, but the reverberations from the stock’s massive thud continue. Morgan Stanley and Citigroup were fined $5 million and $2 million respectively for their involvement in what the State of Massachusetts called “improperly influencing the stock offering process.” The order handed down by Secretary of the Commonwealth William F. Galvin said Morgan Stanley improperly coached Facebook executives on how to talk to stock analysts so the IPO price could be inflated, according to the New York Times. Facebook’s IPO price was an artificial bubble, similar to that of the housing market in the mid-2000s and the dot-com bubble of the late 1990s. But this bubble was not caused by debased currency or sudden interest rate hikes implemented by the Federal Reserve. Shoddy rules that govern IPOs, along with insiders sharing certain information only with one another, are the primary culprits here.

Investigation Revealed a Conspiracy

The State Of Massachusetts found that Morgan Stanley encouraged its investment bankers to give certain individuals information about Facebook’s revenues that the general public did not receive. Michael Grimes, managing director for investment banking at Morgan Stanley, directed Facebook’s treasurer to disclose only certain information which he drafted to the general public. Grimes, however, told a group of analysts of the social media giant’s expected lower revenues in the coming months, based on several factors. The sharing of this information with analysts violated the dot-com era rule that prohibits bankers from talking to analysts prior to IPOs. So far Facebook has not been accused of any wrongdoing by the SEC, while the California-based company is out of the jurisdiction of the State of Massachusetts to pursue an investigation.

No Growth in Sight

Dilemma With Facebook and IPO RulesFacebook recently surpassed the one billion user plateau, but that number is highly misleading. Less than 20 percent of Facebook’s users resides in the USA and Canada. This is significant because nearly half of Facebook’s $1 billion in ad revenue in the third quarter of fiscal 2012 came from users in those aforementioned countries, according to CNN Money. On average, Facebook makes about $3.20 per North American user, compared to 55 cent per user in Asia. Though VPS Hosting Plans are becoming more popular in Asia, the subsequent savings on web administration for businesses and personal users has not translated to spending on the continent’s most popular social network. Investors who lost thousands continue to place blame the bankers and Facebook CFO David Ebersman for not fully disclosing all pertinent information for them to make a wise investment decision. But there have been more than enough signs to raise red flags. It was widely reported that U.S. and Canadian Facebook users steadily declined throughout 2011 and 2012, taking a huge chunk of revenue with them. Facebook shares were added to the Nasdaq 100 Index on December 12, which was supposed to rally its prices. Instead, the stock fell more than 5 percent the following Friday and appears to be stuck in neutral at the $26-$27 range.


Author bio: Paula Miller Advising business and home owners on which stock options are the best investments for a strong portfolio, Paula has been consulting stock holders and writing about finance for 35 years and she never ever gets bored.

Image Credit: tsevis

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