The I.P.O. of Facebook was much anticipated. However, it did not go as smoothly as expected. There were many problems, including technical glitches at the NASDAQ and the final offering price not being set until the day before trading began.
Another issue that has arisen is the allegation that analysts at the large underwriting investment banks cut their financial forecast for Facebook just before the I.P.O. and told only a handful of clients that were preferred investors.
As a result of these issues, Facebook and the investment banks that led the I.P.O., including Morgan Stanley, are the subject of dozens of shareholder lawsuits. The shareholder lawsuits claim Facebook made a material misstatement in the I.P.O. prospectus concerning its slow growth in advertising revenue. The shareholders allege the prospectus did not adequately disclose Facebook’s business risks and the analysts knew more about these risks and cut their business outlooks accordingly, but only told preferred investors.
Under Section 11 of the Securities Act of 1933, those who obtain their shares in the I.P.O., or who can trace shares to the distribution, can sue for any material misstatement or omission in the company’s registration statement, which incorporates all the information in the prospectus.
The success of these claims will come down to whether the information provided to the preferred investors should have been provided to the public and whether Facebook should have given more specifics about their advertising growth, which was vaguely mentioned in the prospectus, so investors could make their own determination about the company’s growth potential.
Facebook’s response to these allegations is it adequately disclosed all information it should have to investors and NASDAQ was responsible for the drop in price because of the trading glitches.
It will be interesting to see how this case will be resolved.