More dirt on the Facebook IPO: Facebook tried to hide mobile risks

Will this Facebook IPO mess never be behind us?

New allegations surfaced today that Facebook and the Securities and Exchange Commission fought over ad effectiveness data, including mobile monetization, in the months preceding Facebook’s initial public offering.

As Bloomberg reports, the SEC was skeptical of some of Facebook’s social ad claims, which were apparently based on Nielsen data, and asked for backup documentation. For example, this is one of the claims in Facebook’s original S-1 registration statement (emphasis added):

Social Ads. We offer tools to advertisers to display social context alongside their ads. As a result, advertisers are able to differentiate their products and complement their marketing messages with trusted recommendations from users’ friends. A recent Nielsen study of 79 advertising campaigns on Facebook demonstrated a greater than 50% increase in ad recall for Facebook ads with social context as compared to Facebook ads that did not have social context.

Above: Facebook stock since the IPO

Image Credit: Google Finance

After back-and-forth conversations with the SEC’s Barbara Jacobs, that paragraph changed in an amended statement to eliminate the Nielsen reference:

Social Ads. We offer tools to advertisers to display social context alongside their ads. As a result, advertisers are able to differentiate their products and complement their marketing messages with trusted recommendations from users’ friends. Our recent analysis of 79 advertising campaigns on Facebook demonstrated a greater than 50% increase in ad recall for Facebook ads with social context as compared to Facebook ads that did not have social context.

In addition, it was only in May, days before the actual IPO, that Facebook added additional cautions about mobile monetization after requests from the SEC.

All of this contributed to almost the worst IPO of any company in a decade, a stock that is still down almost 50 percent since May, and one that may bottom out as low as $15, and a lull in IPOs that is only now starting to reverse.

“Facebook’s disputes with the SEC over pre-IPO discloses does not put its management in a good light,” says Anthony Michael Sabino, a professor at John’s University’s Peter J. Tobin College of Business. In addition, he adds, the new revelations “will fuel pending shareholder litigation.”

Sabino says that some wrangling between the SEC and a pre-IPO company is normal and to be expected, but that this degree of conflict is indicative of a “pretty serious dispute.”

It is worth noting in Facebook’s defense that this language appeared in the risks portion of the original S-1 filing, detailing that mobile was a challenge:

[advertising revenue could be adversely affected by] …

increased user access to and engagement with Facebook through our mobile products, where we do not currently directly generate meaningful revenue

Investors, of course, are responsible for their own investment decisions. Facebook was responsible for providing relevant information in a timely way so that investors could make informed choices.

Clearly, the company could have done that better.

VentureBeat contacted Facebook for comment on this story and will add any new information we receive.

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