Regulators Don’t “Like” How Facebook’s IPO Went Down

by Jordan Richardson on May 23, 2012

Facebook’s IPO fortunes haven’t exactly been the boon the markets were waiting for and now it looks like two American regulators want to review its market debut.

The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) want to review the initial public offering for two reasons: the NASDAQ delay and Facebook’s underwriters’ cutting of its revenue targets.

First up, Facebook’s stock has continued to drop since the IPO. As of press time, FB is currently down 8.90 percent to $31.00 a share. The controversy over how the IPO was handled has to have made a dent in the social networking giant’s long-term fortunes, although it’s possible things could swing around once the debut is properly reviewed. It’s also possible that fortunes could sink even lower once the IPO sees review.

NASDAQ has since apologized for any trouble that may have been caused by delays on its end on Friday. The delays caused some orders of Facebook stock to go unfilled and unconfirmed for hours after they were placed. It is possible that these delays could have caused millions of dollars in losses for some brokerage firms and investors.

At least two of Facebook’s underwriters (Morgan Stanley and Goldman Sachs) shockingly revised their fiscal forecasts during the so-called “road show,” but those revisions were only passed along to major clients. The revisions were made after Facebook added warnings to the IPO prospectus about its user base increasing at a more rapid rate than the number of advertisements on the site, meaning that the potential for revenue growth was, at least for the time being, shrinking.

Morgan Stanley cut its revenue targets as a result, so it’s probable that some investor reaction was tempered once the major clients found out about Facebook’s advertising concerns. The exact numbers as to how much revenue targets were cut are not available at this time, but one has to imagine that it was significant enough to cause some investors to back off from FB stock.

Of course, the situation left smaller investors in the lurch. According to at least one writer, Henry Blodget of Business Insider, this “selective disclosure” was “grossly unfair” at best and at worst seems a “violation of securities laws.”

Still, Facebook’s underwriters jumped in and purchased FB stock on the first day of trading to keep it at or above the $38 valuation. Once the fuss died down, the underwriters stopped buying and the shares have dropped to what many are calling more realistic levels.

While the regulators sort this out, Facebook’s IPO takes its place in history. It’s still an expensive stock as far as many tech stocks go and its IPO was a success in that it was one of the largest of all-time. But the long-term picture is less dazzling, with forecasts for growth and earnings singing a less-than-optimistic song.

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Written by: Jordan Richardson. Follow by: RSSTwitterFacebook, or YouTube.

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