A dozen letters, published a month after the May 17 IPO on the SEC's website, depict a Facebook management team hesitant to disclose information and still guessing at even rudimentary aspects of its business just weeks before the company held the largest-ever technology initial public offering. Many of the issues raised by the SEC and now unnerving investors were foreshadowed in the then-private correspondence between the SEC and Facebook, raising questions about whether investors should be given access to all pertinent documents prior to IPO filings.
SEC doubted claims
"They were given the benefit of the doubt when they went public that they were ready for prime time," said Michael Pachter, a managing director at Wedbush Securities Inc. "They still haven't proved that they are."
The 2 1/2-month volley of messages among SEC officials, Chief Financial Officer David Ebersman and Facebook's law firm Fenwick & West make clear the SEC doubted some of Facebook's claims as it lined up potential investors.
When Facebook filed its proposal Feb. 1 to go public, for instance, it touted the effectiveness of ads linked to customers' friends, citing research from Nielsen, the audience-counting company.
Barbara Jacobs, an assistant director for corporation finance at the SEC, was skeptical, as she and her staff vetted the filing to ensure Facebook had disclosed all material information to investors. The claim appeared to be drawn from marketing materials, not a Nielsen study, she wrote to Ebersman.
On Feb. 28 she gave him an ultimatum: Produce the study and provide Nielsen's consent for use of the data, or don't use it. Facebook dropped the reference after initial resistance.
On the most critical issue facing Facebook's future as a public company - whether it could make money from the soaring number of mobile users, who see fewer ads than other customers - the letters show executives holding back crucial details until the SEC pushed for further disclosure.
Some counted twice
Noting that Facebook was counting some mobile users twice, Jacobs wrote March 22: "Please explain to us how you determined that your metrics are not overstated." Only eight days before the IPO, on May 9, did Facebook make clear in a filing that daily mobile customers were increasing faster than advertising growth. It was the strongest public signal that the IPO could fall short of its high expectations.
When Jacobs asked for the impact on revenue of greater mobile use, Facebook attorneys told her the company couldn't "specifically assess the impact" as those users may also be using personal computers to get onto Facebook. When asked how many new users were mobile-only, the company estimated that 69 million, or 44 percent, of the 156 million new users might be mobile-only.
Asked about the geographical breakdown of mobile users, she was told Facebook didn't have a reliable count - the company, for instance, counted as Canadian many BlackBerry users around the world because the servers are based in Canada.
This prompted Jacobs to question whether Facebook's then-overall user count of 845 million might be wrong as a result of the fuzzy number of mobile users. Facebook said it believed its data were "reasonably accurate" as overall data eliminated the multiple counting of mobile users.
SEC correspondence
It's not unusual for a company going public to tussle with the SEC over what should be included in its prospectus. Yet, Jacobs' inquiries underscored growing concern within the SEC over the way newer consumer Web companies account for increasingly large user bases. The regulator is spending more time scouring user-growth metrics and requiring more details.
Last year the agency pressed Groupon to abandon an accounting method that made the then-unprofitable daily coupon business look profitable by hiding certain marketing costs, a person familiar with the matter said at the time.
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