Letters released on the SEC’s website after Facebook’s IPO indicate the firm’s management team was hesitant to disclose information and still unsure about its business model only weeks before the offering.
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The SEC apparently gave the company the benefit of the doubt despite two and a half months of dialogue questioning the basis Facebook used for the effectiveness of its advertising model.
A prime issue is whether Facebook can make enough money from mobile users who see fewer ads than others. This was a critical component in the company’s growth projections and is even more critical today.
The company announced on October 4 that its user base had increased to one billion world-wide, up from 845 million at the beginning of 2012.
Over 600 million use Facebook over a mobile device, the source of the company’s major revenue challenge.
The SEC wrote letters before the offering pushing Facebook to disclose key financial information such as decelerating revenue growth, user count, and its dependence on Zynga, a gaming company.
All of these issues were kept quiet in pre-offering filings but became concerns afterward.
The SEC currently does not release such correspondence until at least 20 days after an offering.
The reasoning behind that policy is the possibility that investors could misinterpret communications between the company and SEC officials before companies have the opportunity to present a more robust picture
Analysts say the Facebook offering should have been delayed after the reduction in forecasts so that the market could grasp what was happening at the company.
Over 40 lawsuits have been filed against the firm based on claims of trading errors on the Nasdaq exchange as well as the revised earnings forecasts, which were not released until after the offering.