Thursday, May 31, 2012

IPO Fallout

Egg On The Facebook

Facebook logo and question mark
 ~ What does the Facebook debacle bode for future IPOs, especially with the impending rules changes?

Facebook went public at a valuation of $104B. In the two weeks since, the stock has swooned to below $30 a share, and the valuation has shriveled to $80B. (OK, maybe shriveled is the wrong word; it's still $80 billion after all.) But this isn't supposed to happen with IPOs; the stock is supposed to go up and make everyone rich!

So, bring on the lawsuits. There are several reasons given for initiating these lawsuits, but there would not be any at all if the stock price hadn't tanked. There would be no complaints if no one had lost money. But they have lost, and on what was thought to be the very hottest deal to come along since Google.

What happened?
Though a few claim the company's IPO documents omitted material facts, plaintiffs are also accusing lead underwriter Morgan Stanley of making crucial information known to only a few investors.

Information about these accusations is scarce, but they seem to be connected to Facebook's decision to update their IPO filings on May 9, which the Associated Press reports was three days into its pre-IPO road show. With users switching to mobile gadgets, Facebook projected that it would see a reduction in its quarterly revenues.

Executives gave this information to underwriter analysts and told them their revenue forecasts should be at the lower end of the previously provided spectrum. This information was then given to institutional investors, while Business Insider report smaller investors were left in the dark.
Well. Flawed disclosures and insiders taking advantage. Regulations that have left Wall Street free to take advantage of small investors who lack insider knowledge and connections. And no one apparently obligated to ensure critical information was available to all prospective investors.

Facebook was hyped as a celebration of the pinnacle of entrepreneurship—the big bonanza that rewards everyone and spurs all entrepreneurs and early investors to work harder to build companies, generate economic value and create jobs.

And it all happened without benefit of the recently enacted JOBS Act, which will reduce regulation and reporting in an effort to make IPOs cheaper, faster and easier for companies and their underwriters.

Facebook stock may well rise back to or above the IPO price, and the Facebook lawsuits will need to play out before we can know the extent of any malfeasance or deception. The even looser rules that the JOBS Act includes will make the IPO process easier still to manipulate, and retail investors more likely to lose. As Morgan Stanley and the rest of Wall Street cash in, it's worth pondering who the JOBS Act primarily benefits.

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