SEC Rules Could Push Facebook to an IPO in 2012, or Maybe Not

Facebook has indicated that it expects to expand its investor base to more than 500 folks this year, pushing it into the realm where the Securities and Exchange Commission will require it to disclose its nitty-gritty financial results to investors and the public. And according to a Wall Street Journalreport, that pending document dump may be enough to push the closely watched social networking giant into rolling out an IPO by April 2012.

Under SEC rules, private companies that exceed the 500-investor threshold are required to register with the agency 120 days following the year of the breach, The Wall Street Journal noted. In Facebook's case, that means either releasing financial information as a private company, or launching an IPO. And while investors may be rooting for the IPO, Facebook may ultimately find that opening up its books as a private company suits it just fine, either for the short term or the long haul.

For example, Facebook could take the SEC requirement and use it like training wheels for its post-IPO life, gathering experience in publicly releasing extensive financial information while remaining a private company. Lise Buyer, founder of IPO advisory consulting firm Class V Group, had this to say on the pros and cons of such a strategy in an email interview:

The good news is that the company has one more year to "season." [Facebook CEO Mark Zuckerberg] has made remarkable strides as a public speaker in the past 12 months, but another year can only help with the public presentation side. Much more importantly, on the outside and even with today's numbers, we have no idea how predictable and how consistent the company's quarterly results are. Maybe they can already forecast the P&L reasonably well from year to year and quarter to quarter, but maybe they are growing so fast that the forecasted and actual results vary widely from period to period. An extra year of data generally helps all modelers in all companies to be more accurate. Third, maybe there is some new leg to the business model yet to be launched. It is likely definitely preferable for them to be able to experiment with model tweaks while still private. Finally, being public is a distraction because companies have an actual obligation to deal with -- at least on some level -- public investors. Putting that off a year certainly could have some appeal.

The biggest pitfall is timing and reputation risk. The market is very hot to pay big bucks for this security today. Perhaps they will be just as anxious to buy shares at whatever the price next year. Perhaps there will be even more demand next year. But there is always a flip side to that which says "perhaps not," so the company is taking the gamble that rather than "striking while the iron is hot" today, it will wait for even more steam tomorrow. This could certainly work out very much in its favor, but there is a non-zero chance that it could go the other way.

Finally, and perhaps it won't matter much, but there is the statement that they are making to the members who really are behind their success that says, you, the little people aren't entitled to buy our stock at this price, this opportunity is for the rich and famous. You, the lowly individual investors who aren't part of Goldman's inner circle, will only be allowed to pan for gold in this stream after the bigger nuggets have been claimed. Even if the company eventually goes public at a much higher valuation and then goes straight up from there, the opportunity for what I will call the Facebook member investors, will be less than the opportunity offered to the wealthy today.

The Advantages of Staying Private

Facebook, of course, could opt to continue to run as a private company for the long haul, much as business analytics software maker SAS Institute, which has grown to generate more than $2 billion in revenues, has done since 1976. A decade ago, SAS considered offering up a fifth of its stock in an IPO, but that decision was ultimately nixed. The company had enough available cash, and it preferred the freedom to invest 25% of its revenues into research and development without Wall Street looking over its shoulder. The company's founders, Jim Goodnight and John Sall, remain the only investors in the company.

Buyer, a former Wall Street analyst, banker and the Google employee who was tasked with taking the search giant public, notes that one of the biggest advantages to remaining private is the absence of having to deal with shareholders. Private companies can skip writing quarterly earnings press releases and holding conference calls, as well as scheduling analyst days.

One proxy solicitor points out some other benefits of remaining private: "There's no Sarbanes Oxley [regulations], no worries about shareholder activists because you control who gets your stock and no proxy fights."

In addition, hostile bidders won't bother with making a play for a privately held company because they would lack access to the necessary shares to push a deal through, noted an attorney who specializes in mergers and acquisitions.

Investors Are Itching for an IPO

On the flip side, the positive aspects of launching an IPO include the ability to gain a "wisdom of crowd valuation," which can come in handy when a company is looking to use its stock as currency to make an acquisition, Buyer said.

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And Facebook investors, of course, would be furious if they invested in the social networking giant only to learn that an IPO wasn't in the cards for next year, if ever. The potential of a Facebook IPO has captured investors' attention for years, and more recently, the social networking giant has seen a lot of action on private exchanges, with venture capitalists, former employees and others selling their Facebook shares and clearing more than $25 a share.

Facebook reportedly has five classes of stock, a strategy designed to keep Zuckerberg in control of the company even if it goes public -- similar to the tactic employed by Google's founders. But tipping the scales in favor of Zuckerberg on shareholder vote matters has the potential to reduce the company's ability to grab top dollar with its IPO, notes the proxy solicitor.

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