Facebook (FB) IPO Disaster A Reason To Revisit Sarbanes-Oxley?

The largest IPO in history has also turned out to be one of the biggest disappointments. Facebook Inc (NASDAQ:FB), the world’s greatest social network website in terms of the number of subscribers as well as monthly visits, attracted hundreds of thousands of investors, if not millions, only to throw a bombshell of disappointment since it started trading only a few days ago.

While those of us who remained coy to invest in the largely publicized IPO can sit on the sideways and pride on their instinctive lucky escape, the majority of investors are lamenting on their disastrous losses. Others are still holding on to see the turn of the cycle, which could minimize their current amounts of losses.

What exactly happened with the FB IPO and was it avoidable?

Recent publications have one major concern on Facebook IPO. All of them point to a fact that, some investors avoided the wrath of a disastrous IPO because they received critical information on the absurd valuation. This brought about criticism from various authorities reliving memories of the time before the Sarbanes-Oxley Act.

Sarbanes-Oxley Act of 2002 squarely puts into scrutiny, the underwriting process of Facebook Inc (NASDAQ:FB) IPO. It is quite clear that any information, which can change an investor’s opinion over a certain stock, is materially important, and therefore, the public has the right to know it before making any investment decision.

Many small companies have avoided going public when they are small due to the costs of compliance. If Sarbanes-Oxley was not in place, perhaps Facebook would have went public at a valuation of $1 billion or even $100 million. The mess could have been avoided and small investors could have made money?

The general information on Facebook IPO suggests that analysts made some changes to the projected revenue, which reduced the forecast figure by about 18%. Coincidentally, by the close of the market today, May 29, the company’s stock price differed from its offer price of $38 per share by approximately 18% lower. The change in revenue projections qualifies to material information, which apparently the underwriting company in this case Morgan Stanley (NYSE: MS), failed to avail to investors at large.

Taking the above scenario into perspective, I challenge the process of preparing Facebook IPO based on the following sections of the Sarbanes-Oxley Act.

  • Section 302: “The financial statements and related information fairly present the financial    condition and the results in all material respects”—the revenue projections availed to public did not fairly present the financial position of the company.
  • Section 401: “Financial statements published by issuers are required to be accurate and presented in a manner that does not contain incorrect statements or admit to state material information. These financial statements shall also include all material off-balance sheet liabilities, obligations or transactions”—Facebook was tussle for image and advertising rights with Yahoo! Inc. (NASDAQ:YHOO). This is one of the main reasons the projected revenue changed by 18%.

Finally, we still have one begging question of; whether we should revisit Sarbanes-Oxley Act. Perhaps it is necessary. Only a decade into the enactment of the provisions in the Act, the two clauses, seem to be nonexistence in corporate responsibility charters of some companies.

Some critics believe that it is a matter of integrity, when it comes to these kinds of cases, a good example being Facebook IPO, where they believe that it was upon Morgan Stanley (NYSE:MS) to decide whether or not, to communicate the changes on revenue projections to the public. Personally, I disagree with their opinions because, there are laws enacted to monitor such cases, for instance, Sarbanes-Oxley as we have seen, and the only issue is thorough implementation. I

In short,the guidelines were in place just this was a fiasco for various reasons.