The Facebook IPO is a pretty big deal
generally. Whether Facebook would go public stirred media frenzy and
Congressional testimony in the past year. Facebook's initial registration statement indicated it would be the
largest tech company IPO ever (the fee table on the original filing showed a $5
billion offering - the filing fee alone was $573k). And the company's
social importance is undeniable.
But what will the SEC staff think about Facebook's
disclosures? Will the path to going public hit some speed bumps? We
got our first big clue on Wednesday, when after the markets closed Facebook
filed its first substantive amendment to the Form S-1 for its IPO. (It
filed Amendment No. 1 shortly after its original filing, solely
to add exhibits.)
On interesting deals, I sometimes compare an amended S-1
to the prior filing to see what changed. Seeing what disclosures a company
has changed lets me surmise whether SEC comments may have driven the change and
piece together the issues the SEC staff has raised with the filing. In a deal
like Facebook's, you can assume the staff heavily, carefully reviewed the
filing, so the comments the staff elected to give may reveal points of general
SEC emphasis, with potential application to other companies. A deal like this
also tends to become a frequently used source for future disclosures by other
companies looking for precedents, which makes monitoring Facebook's disclosures
Or perhaps that's just my rationalization - I just
couldn't help but spend a few hours looking at this...
In any event, for kindred spirits, my guess is that
Facebook probably received SEC comments clustered around the themes discussed
below. For those who do not routinely review registration statements, this
post will be fairly technical and you may want to stop reading now.
1. "Controlled Company"
disclosure now on cover - Disclosure has been added
to the prospectus cover page that Facebook is a "controlled company"
under applicable listing rules, and it intends to use the corporate governance
exemption for such companies from having an independent nominating committee.
2. Zuckerberg's control -
A new section has been added to the box summary that Zuckerberg's control may
make Facebook shares less attractive to certain investors. It highlights
Zuckerberg's post-IPO ownership percentage, that his ownership level could
delay or preclude a change of control transaction, and that his ownership could
discourage investors from buying shares due to the limited voting power they
would have. It also discusses that Facebook does not intend to have an
independent nominating committee. Disclosures regarding Zuckerberg's control
were also reinforced elsewhere in the book, such as the risk factor regarding
3. Dual-class structure -
Facebook reinforced its disclosures on its dual common stock structure as
potentially "precluding" new shareholders from influencing corporate
4. "Exclusive forum" provision -
Facebook added disclosure that the "exclusive forum" provision in its post-IPO
certificate of incorporation, which provides that most corporate law suits
brought by shareholders must be brought in Delaware, may be unenforceable.
See our prior post regarding these types of exclusive forum
RSUs tied to IPO
Facebook granted numerous RSUs with vesting tied (1) to a
service condition beginning from the date of grant, and (2) to a liquidity
event condition, which the IPO will constitute, plus the lapse of 6 months.
Facebook did not expense these RSUs at 12/31/2011 (or prior periods) due to the
IPO condition not having been met, but it will need to expense a significant
cumulative amount for the portion of the RSUs that had met the service
condition (but not the IPO condition) at the IPO date. This expense will
be a tremendous number, and it seems to me that the staff likely asked
several questions about this. For instance:
5. Accounting disclosures -
6. Liquidity disclosures -
Facebook discloses that, last month, it terminated its prior $2.5B credit
facility and entered into (1) a new $5B facility (only $2.5B available until
IPO closes), and (2) a new $3B revolving credit facility "to fund tax
withholding and remittance obligations" related to settling the RSUs it
granted with vesting tied to the IPO - that is a lot of withholding!
7. Compensation disclosures -
In CD&A, the deferred vesting schedules of RSUs are stated more
specifically, and the "initial equity value" of the RSU awards are quantified.
8. Reliability of data - Facebook
provides metrics throughout the prospectus that it generates from its internal
records, such as daily active users, monthly active users, and mobile users.
Facebook added several disclosures, including reinforced disclosures in the
"Industry Data" section and a new standalone risk factor, regarding
how its internally generated numbers may be unreliable or inaccurate, such as
if users have duplicate accounts or if Facebook's mobile apps that
automatically ping its servers are doing so for inactive users.
9. User Metric Trends -
Facebook's original MD&A began with a discussion of user trends. In the
amendment, there are several changes to make this discussion more specific and
connected to financial performance. Facebook now:
10. Monetization by Geography -
Facebook added new discussion of trends in monetization by geographic region.
11. Factors Affecting Performance -
Facebook added several factors affecting growth, including user growth,
increases in mobile users (unproven ad revenue in this space), and how to make
ads more valuable.
12. Share-based compensation -
The original S-1 had a lengthy discussion of share-based compensation. A
well known and sensitive disclosure topic in an IPO, perhaps it is no surprise
to see several changes here:
13. Quantification in MD&A -
Facebook added disclosures to quantify when multiple factors contribute to a
period-over-period change. For example, it added new disclosure in cost of
revenues discussions that quantifies the effect of depreciation, rent, and
14. Deferred revenues and deposits -
Facebook added disclosure to separate out deferred revenues from deposits,
explaining what each represents separately and quantifying them.
15. Peer group/Benchmarking -
Facebook presented the revenue range for the peer group it uses, and clarified
that it does not employ targets for most aspects of its award decisions.
16. Use of Discretion -
Facebook added in several places that its compensation committee makes
"qualitative assessments" based on listed factors, without preset ranges.
17. Calculation of NEO cash bonuses -
details were added regarding individual cash bonus calculations, including a
table setting out awards by person.
Related party transactions
18. Identifying affiliates -
Facebook has named the affiliates involved in the agreements rather than only
naming some parties (with an "and other parties" catch-all).
19. Terms of agreements -
Rather than saying certain agreements were on "commercially reasonable
terms," Facebook now specifies agreements that use its online general
terms and conditions. If terms were specially negotiated, Facebook added
disclosure regarding the negotiation process, such as the non-involvement of
potentially conflicted insiders in the negotiation. Facebook also made these
changes in related sections (e.g., the Reg Rights Agmt is also discussed
in Description of Capital Stock).
Miscellaneous other possible comment areas
20. Zynga risk factor -
in the risk factor regarding Facebook's reliance on Zynga for revenues,
Facebook has added that Zynga has launched games on non-Facebook
sites. One wonders if the Staff cross-compared Zynga's disclosures with
Facebook's and noticed a few minor inconsistencies (or if Facebook is
monitoring Zynga's disclosures).
21. Identification of industry sources -
throughout the prospectus, previously unnamed industry sources have been
identified, and related disclosures attributed to those sources have been
rephrased in various ways. One presumes the staff has asked Facebook to
supplementally provide its backup materials to the staff, keyed to its
22. Specific examples and
quantification - In several places, Facebook injected
specific examples of a disclosure point. For example, it quantified the
number of users using Facebook Payments. As an example of possible IP
litigation, Facebook added disclosure that last month Yahoo! sent Facebook a
letter alleging that a number of Facebook products infringe the claims of 13 of
23. Beneficial Ownership Table -
the footnotes for Goldman and T. Rowe Price regarding who at these entities has
voting and dispositive power have been expanded (but do not name specific
24. Privacy risk factor bolstered -
this risk factor now discusses hostile/inappropriate users, fake identities,
It is difficult to say if all of these changes were in
response to SEC comments, but my guess is that a large number of them
were. It is also possible that Facebook received other SEC comments for
which it is explaining its position to the staff rather than revising its
disclosures. When the next amendment is filed, we can again compare
filings and see if we can identify any additional possible issues.
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