The highly anticipated initial public offering (IPO) of social media giant Facebook has raised serious questions about the information offered to investors prior to the initial securities offering. Investors have filed a class action suit against Facebook, Morgan Stanley and other underwriting banks. Two Congressional committees have also requested briefings to evaluate whether the underwriters, the professionals who help a company with the requirements of the IPO, misled retail investors about Facebook’s revenue projections.
The Securities Act and the Facebook IPO
The crux of the controversy is whether key information about Facebook’s revenue was provided to only a limited number of top executive investors during invitation-only “road show” question and answer discussions, rather than retail investors, despite the obligation under the Securities Act to provide the revenue information to all investors. Lawyers who filed the class action allege that information about Facebook’s decreasing revenue due to dwindling personal computer use was only provided to a limited number of potential investors.
Some analysts critical of the handling of Facebook’s IPO argue that road show events are inherently flawed because the information discussed between Facebook executives and institutional investors is not released to the public. Critics of the road show discussions believe that these Q&A sessions should be taped and aired publicly on the Internet or, at a minimum, retail investors should be allowed time to have their questions about a company’s revenue answered in a pre-IPO setting. If information about Facebook’s decreasing revenue stream was not widely distributed to all potential investors, there may be a claim for a Securities Act violation.
Two separate committees in Congress are also evaluating Facebook and the controversy surrounding the IPO. The Senate Banking Committee has started an inquiry to evaluate Facebook’s IPO, during which experts discussed the road show events and the alleged Securities Act violations. House Financial Services Committee members also requested briefings about the IPO.
Facebook and Morgan Stanley, however, argue that the revised revenue projections were widely distributed to all banking institutions and retail investors on May 9, in advance of the May 18 IPO. A Facebook spokesperson stated that the class action suit is without merit and said Facebook will vigorously defend against the lawsuit.
How to Protect Yourself as an Investor
The Securities Exchange Commission regulates IPOs and the Securities Act gives the SEC power to regulate stocks and sellers of securities. The Securities Act includes provisions that allow investors to file a legal action directly against stock underwriters or a company if information material to the sale of securities was withheld from investors or was misleading to investors.
A consumer who wishes to invest in securities should always review the following information, which is required for all companies offering to sell securities on either the NASDAQ or New York Stock Exchange:
- Prospectus: This document describes the financial picture of a company or corporation and is often distributed to investors by the underwriters or brokerage firms working on the initial securities offering.
- Registration form: The Securities Exchange Commission has the authority to determine the type of information required in the form, but typically it includes past business sales, past revenue, future projections and risks of the business.
Being an informed investor is, in many ways, the responsibility of the individual seeking to invest his or her funds; at times, however, the company or the underwriters may mislead or fail to disclose critical information that is required under the Securities Act. If you believe that you have been harmed by a violation of the Securities Act, it is important to contact a knowledgeable Missouri consumer fraud lawyer.