SEC Trending – Facebook IPO

Facebook is being advised by Fenwick & West led by Gordon K. Davidson, Jeffrey R. Vetter and James D. Evans.Simpson Thacher & Bartlett is advising the underwriters led by William H. Hinman, Jr. and Daniel N. Webb.The underwriters are led byMorgan Stanley & Co. and include J.P. Morgan Securities, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith, Barclays Capital Inc. and Allen & Company.

The company is registering Class A common stock which will have one vote per share and currently has approximately 110 stockholders. Facebook also has a Class B common stock which has 10 votes per share with approximately 1,070 stockholders. The outstanding preferred stock will convert into Class B common stock upon closing of the IPO. The officers and directors, as a group, currently hold approximately 36% of the Class A common stock and 70% of the Class B common stock with 69.8% of the total voting power. Other significant stockholders include venture capital firm Accel Partners and affiliates with approximately 11.4% of Class B common stock and total voting power, DST Global Limited and affiliates with approximately 31.4% of Class A common stock and 5.4% of Class B common stock and 5.5% total voting power, Dustin Moskovitz, Facebook co-founder, with approximately 7.6% of Class B common stock and total voting power, Goldman Sachs and affiliates with approximately 56.3% of Class A common stock and T. Rowe Price Associates with approximately 5.2% of Class A common stock. James Bryer, a Partner with Accel, is a director of Facebook and is considered to have shared voting power over the Accel stock.

Some of the holders referenced above are subject to various agreements between the parties, Facebook and Mark Zuckerberg, Chairman and Chief Executive Officer, restricting the ability to sell or vote the stock based upon information in the Related Party Transactions and Principal and Selling Stockholders sections. These include DST Global Limited, Dustin Moskovitz, Accel Partners and James Bryer. These agreements are listed in the exhibit list to the S-1 but will be filed on amendments to the registration statement.

The risk factors section included approximately 50 entries. Certain significant or interesting ones include:

• The first and most significant risk factor was the retention of existing users and addition of new users. Facebook reported 845 million monthly active users (MAUs) as of December 31, 2011.
• The second risk factor indicated the company’s reliance on advertising as a significant majority of Facebook’s revenue. Advertising accounted for 98%, 95% and 85% of its respective 2009, 2010 and 2011 revenue. The company also pointed out the short-term commitments prevalent in advertising purchases.
• The third risk factor addressed the increased use of Facebook on mobile applications where the company does not currently display advertisements. More than 425 million MAUs utilized Facebook mobile products in December 2011 and the company sees the overall ratio of user growth on the mobile platforms.
• The fourth risk factor addressed the company’s inability to control the operating systems, networks and standards of mobile platforms and the potential user experience.
• The fifth risk factor discussed the possibility of not being able to grow or further monetize the platform particularly in regards to third party developed applications.
• The sixth risk factor portrayed the highly competitive nature of the business. Facebook named Google, Microsoft and Twitter as competitors along with regional competition from Cyworld in Korea, Mixi in Japan, Orkut in Brazil and India and vKontakte in Russia.
• The seventh risk factor was the restriction of access to Facebook by foreign governments and indicated that China, Iran, North Korea and Syria currently restrict access.
• Facebook also listed the significant amount of revenue generated by its relationship with Zynga, the social game developer. In 2011 Zynga accounted for approximately 12% of revenue through fees charged for Zynga products and advertising Zynga purchased. Zynga completed its initial public offering in December of 2011 and listed its ability to maintain a good relationship with Facebook as its most significant risk factor.
• The company indicated past regulatory investigations and settlements and the expectation that it will be subject to additional investigations in the future. In 2011 Facebook entered into a 20 year settlement with the U.S. Federal Trade Commission over its treatment of user data and privacy settings http://www.ftc.gov/os/caselist/0923184/111129facebookagree.pdf. The company was also the subject of an audit of its data, security, and privacy practices and policies by the Irish Data Protection Commissioner.
• The company also explains its involvement in various class action lawsuits and other litigation. Although it does not name specific cases in the risk factor section it does indicate in the legal proceedings section a pending lawsuit against it and Mark Zuckerberg by Paul Ceglia over ownership of the company and an investigation by the Enforcement Division of the SEC into secondary transactions in the sale or private company securities as well as the number of stockholders of record.
• Facebook discussed the significant control Chairman and CEO Mark Zuckerberg has over the company through his majority stock ownership and voting agreements with various stockholders. This control would influence matters submitted to stockholders such as mergers, election of directors as well as the ability to designate his successor.
• The company described its election to be considered a “controlled company” and the exemption from certain corporate governance rules for publicly-listed companies. Facebook will not be required to have a majority of its board of directors be independent nor will it have a compensation committee or an independent nominating function.

Intelligize will continue to monitor the registration process of Facebook as it moves forward.