Editorial Board

Facebook’s SEC Letters Can Only Help Investors Before IPO

Is there a good reason important information about newly public companies is disclosed only one month after the shares have been sold to investors?

The U.S. Securities and Exchange Commission seems to think there is. It is a view that does a disservice to investors.

As Bloomberg News , the SEC released a cache of correspondence between the agency and Facebook Inc. on June 15, 20 business days after the company went public in a ballyhooed initial public offering. The letters depict a management team that lacked experience, was intent on withholding useful performance metrics and was reluctant to cooperate with the agency’s demands for fuller disclosure. Considering the dismal performance of the stock since the IPO -- down 48 percent -- it seems reasonable to conclude that some investors might not have thrown in their lot with Mark Zuckerberg & Co. had they seen the letters before the offering.

A little background. The SEC reviews many corporate filings, such as prospectuses for acquisitions or secondary share sales, and often writes letters seeking more information or clarification. The agency gives extra attention to companies selling stock to the public for the first time, as Facebook did on May 17.

Public Touts

To that end, the SEC pressed the company to reveal some of the metrics it planned to use to tout its shares to the public. In one exchange, it asked what percent of new users accessed Facebook solely with mobile devices. The answer, it turned out, was almost half, a significant point in that Facebook had already said it found it hard to “generate any meaningful revenue” from mobile users. (Not surprisingly, the issue of mobile usage and revenue generation was a subject of a shareholder suit after the IPO against Facebook and its main investment bank, Morgan Stanley.)

Other issues cited in the letters included Zuckerberg’s control of the company, the importance of game company Zynga Inc. to Facebook’s prospects, the company’s use of customers’ personal information and Facebook’s reluctance to provide figures on average revenue generated by so-called active monthly users.

One can see how a quick spin through this correspondence might come in handy to people thinking of buying shares in Facebook. And let’s not pick on Facebook -- one can also imagine how the pre-filing exchange between, say, the SEC and Groupon Inc. might have prompted investors to question some of that company’s enthusiastic growth projections or its predilection for unorthodox accounting methods. Since it went public, Groupon stock has lost 74 percent of its value.

Releasing Letters

Indeed, the SEC doesn’t dispute the utility of the letters. It was the agency, after all, that decided to release letters 20 business days after an offering had been cleared. (Previously, letters were made public only through Freedom of Information Act requests.)

So why can’t the SEC take the next step and release the letters before an offering? The agency says such a move might confuse investors because they would have too much information to absorb too late in the process. This was the reason Google Inc.’s IPO was delayed by a few days in August 2004: Playboy magazine published an interview with founders Larry Page and Sergey Brin just before the planned share sale.

But withholding information contained in the letters until after an IPO isn’t the answer. It seems perfectly reasonable to have companies attach the letters as exhibits to the final registration statement that describes the terms of an IPO.

New companies need room and capital to grow. The role of regulatory agencies isn’t to hinder that growth but to ensure clarity and transparency in markets. If a company decides to ask the public to help finance its expansion, then that company has a simple obligation: to let investors know what they are buying, warts and all.