Regulators call for review of Facebook IPO

Two US regulators have called for a review of the issues around the initial public offering of Facebook.

Reuters previously reported that an analyst at underwriter Morgan Stanley cut his revenue forecasts for Facebook in the days before the offering, information that was not disclosed to the market before the stock was listed.

Facebook itself had urged analysts working for some of the 33 underwriters to lower their estimates ahead of the IPO, according to four sources with direct knowledge of the conversations that were held during the week prior to the IPO.

They didn’t forecast their business right and they changed their numbers and told analysts

The disclosure of lower forecasts to certain big institutional investors left both Facebook and Morgan Stanley open to accusations of selective disclosure. Many smaller investors who bought Facebook shares in the IPO were left in the dark.

“Facebook changed the numbers. They didn’t forecast their business right and they changed their numbers and told analysts,” said another source at one of the underwriters with knowledge of the situation.

A Facebook spokesman declined to comment.

“Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs,” Morgan Stanley spokesman Pen Pendleton said in a statement. “These procedures are in compliance with all applicable regulations.”

Regulatory attention

The issue of selective disclosure drew the attention of the main regulator of US brokerages.

“That’s a matter of regulatory concern to us and I’m sure to the SEC,” said Richard Ketchum, the Financial Industry Regulatory Authority’s chairman and chief executive. “And without saying whether it’s us or the SEC, we will collectively be focusing on it.

Securities and Exchange Commission Chairman Mary Schapiro said: “I think there is a lot of reason to have confidence in our markets and in the integrity of how they operate, but there are issues that we need to look at specifically with respect to Facebook.”

A Los Angeles law firm filed a lawsuit seeking class action status against Facebook and its underwriters alleging inadequate disclosure of key information.

The legal issues surrounding the disclosure obligations of a pre-public company and its underwriters are murky, securities lawyers said. Public companies are subject to a rule known as Regulation Fair Disclosure, which requires that material information be disclosed to all investors at the same time.

But that rule would not apply to information that Facebook provided to its underwriters before it went public, according to securities law experts. Underwriters also may not have a legal obligation to disclose their proprietary research to all clients at the same time.

Still overvauled?

Facebook shares closed 8.9% lower at $31, following an 11% plunge on Monday. At that price the company has shed more than $19 billion in market capitalisation from its $38-per-share offering price last week.

With the stock falling yesterday, a debate continued over what the social networking company is really worth. Even with the company valued at about $85 billion at the market close, compared with $104 billion at its IPO price, some experts say it is overvalued.

Thomson Reuters Starmine conservatively estimates a 10.8% annual growth rate – almost exactly the mean for the technology sector. On that basis, Starmine says the stock could be valued at $9.59 a share, a 72% discount to its IPO price.

Some big investors, though, protected themselves well. In a securities filing, Microsoft disclosed that it had sold 6.5 million shares at $37.58, meaning the software giant covered the cost of its original investment of 32.8 million shares for just $240 million in 2007, while still retaining most of the stake.