Law

Facebook Exposed – The IPO Lawsuit

On or before May 16, 2021, Facebook finally filed with the Securities and Exchange Commission (SEC) with the required paperwork for the Facebook IPO. The complaint claims that at that point in time Facebook was experiencing a major and severe decline in revenue growth because of an unchecked growth of user base via mobile devices such as iPhones and “other smart phones.”

Further, the complaint contends that Facebook has yet to attract any major high net worth investor to invest in the company and is suffering a significant loss in revenue as a result. At a time when Facebook is seeking a large infusion of capital to expand and grow its business, the loss of the stake by hedge fund manager Mark Zuckerberg to venture capitalist Carl Henry’s Zulvere Investments has been particularly hurtful.

 Facebook IPO Lawsuit

The complaint further contends that Facebook’s offering is not an “ability to purchase” within the meaning of Securities and Exchange Commission (“SEC”) regulations as applied to common stock offerings. Facebook is primarily a Platform as opposed to a utility or product like gasoline or sugar that can be sold in a single transaction and require no further analysis or negotiations with the underwriters. Further, Facebook’s business model does not create a common stock market for the offering nor does it allow for a second party to act as an agent between the underwriter and the purchaser.

Further, the fact that Facebook has a history of not having registered its stock with the SEC makes the enforcement of these rules all but impossible. It is therefore impossible for Facebook to enjoy the protections commonly afforded to “over-the-counter” securities by registering its stock and ensuring timely delivery of relevant information to the underwriters.

The SEC is currently reviewing the Facebook IPO case with a very heavy handed regulatory stance.

One may have expected that after Facebook became profitable in the fourth quarter of 2021 it would immediately file an IPO offering to bring itself more into compliance with SEC rules and regulations. That expectation was based on the fact that Facebook had been a front liner in the social networking world for quite some time and had developed a large number of user and regularly used applications that are regularly used by Facebook users.

As soon as Facebook started generating profits in the fourth quarter of 2021 it became obvious that it was unlikely that an IPO was anytime near. Consequently, at least until now, Facebook has remained mum about any plans it may have for an IPO and has instead focused on grooming its young and inexperienced leadership through acquisitions and the purchase of multiple patents and intellectual property portfolios from the likes of Yahoo! and AOL.

The SEC’s stress tests also indicate that Facebook would be ill-prepared to deal with trading-related issues relating to Facebook Incorporated and the nature of IPOs.

Among the factors considered by the SEC during their stress tests include whether or not the company will be able to accurately determine its own intrinsic value based on the information provided by third parties, if Facebook can predict the price movements of key financial metrics (such as diluted shares) and whether or not Facebook can accurately determine the amount of cash that will be generated by the sale of its stocks. In addition, the company is also concerned about handling trading related claims and questions raised by brokers and other potential customers.

These include questions as to whether or not the company will be able to deliver the services that customers need in light of the volume of user requests for applications and changes to Facebook policies requiring that users create more personal profiles. Lastly, the company is also concerned about how it will address issues such as user privacy, as well as the company’s ability to respond to and handle spam complaints and other concerns regarding the use of its services.

On April 8, Facebook decided to not proceed with an IPO offering because it did not feel that it would be in the best interest of Facebook Incorporated, as it was not likely that such a large distribution of shares would be beneficial.

The decision not to go public was met with widespread criticism from a number of high profile venture capitalists and analysts. Some called the decision an act of “shortsightedness,” claiming that it was based on an incomplete analysis of the financial impact of going public. Others argue that the lack of a secondary public offering demonstrates that Facebook is unwilling to risk such a large capital investment unless there is a very good chance that it will realize a significant profit from doing so.

The IPO resulted in Facebook Inc becoming publicly listed on the New York Stock Exchange, but later that same day, the company released additional financial information to provide more detail on its performance.

In particular, Zuckerberg disclosed that Facebook had registered six new trademarks, all of which are located in countries that are not generally known for their computer technology usage. Furthermore, Zuckberg downplayed the importance of the Facebook IPO in comparison to the growing importance of mobile applications and internet usage, both of which are increasing at an astonishing rate.

He instead focused his attention on how Facebook would continue to meet the needs of its user base, emphasizing that the social networking site will continue to strive for success in order to meet its goals and remain as one of the most popular websites on the web.

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