Back in February, when I was reporting a story on the initial public offering process that Facebook (FB) had just started, I was intrigued to read the back-and-forth correspondence between the SEC and other companies that had recently gone public. (I know, I know; exciting SEC filings? Bear with me for a minute.) The letters are a standard part of the march to going public and they shed light on the debate over what a company must disclose to investors. Once they’re released, typically a month after the IPO, investors can glean nuggets of important—often unflattering—data that companies hadn’t wanted want to reveal.
Today a great story from our colleagues over at Bloomberg News looks at the recently released documents from Facebook’s IPO and finds that the social network fought to keep key risks hidden. The SEC forced Facebook to avoid double-counting mobile users and to disclose that people who accessed the site largely on mobile devices were making up a growing share of its users. This was problematic for Facebook because it derives less revenue for mobile users than for regular ones. Spokesmen for Facebook and the SEC declined to comment for the Bloomberg story.
The SEC also asked Facebook why it didn’t report how much revenue it generated per user. Facebook’s attorney responded that the company preferred to use aggregate numbers. The SEC went ahead and calculated the figures on its own—which showed that per-user revenue was declining. Facebook ultimately included the statistics in its filings.
The Facebook letters show that while there is a push and pull between the SEC and the company looking to launch an IPO, ultimately the SEC has the final word. As Alan Mendelson, a partner at Latham & Watkins, explained to us in February, a company “might have to cave and put something in the document that you prefer not to.” Put another way, had the SEC’s vetting process not existed, investors wouldn’t have known details about the mobile-revenue concerns before the stock hit the market.
But something big has changed since Facebook started its IPO process. In the spring, Congress passed—and President Obama signed—the Jumpstart Our Business Startups Act, a bill that loosened investor protections with the goal of creating more jobs. The bill reduces disclosure requirements for so-called emerging growth companies that want to go public; under the law an emerging growth company can have as much as $1 billion in annual revenue. The bill also opens the way for buyer-beware offerings through crowdfunding. And it allows companies to raise money from as many as 2,000 investors privately, up from the previous limit of 500. When raising money privately, companies are under far less obligation to divulge information. So once the JOBS Act goes in to effect next year, more deals can avoid the SEC process that forced Facebook to show its cards to investors.