May 24, 2012

Not Liking Facebook

Hester Peirce

Former Senior Research Fellow
Summary

Facebook’s initial public offering (IPO) captured the imaginations of many people who had never before considered investing. Much of the interest came from Facebook users who wanted to own a piece of a company that has become a staple of their lives. Others dreamt of turning a quick profit by getting in and out of the stock within the first day or week. Widespread media coverage only added to the fervor.

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Facebook’s initial public offering (IPO) captured the imaginations of many people who had never before considered investing.  Much of the interest came from Facebook users who wanted to own a piece of a company that has become a staple of their lives.  Others dreamt of turning a quick profit by getting in and out of the stock within the first day or week.  Widespread media coverage only added to the fervor.

Yet all this enthusiasm did not produce the IPO “pop” that so many had anticipated.  Instead, it led to an IPO drop, with the company closing lower than it opened on its first day.  The fact that the stock did not rise on Day 1 taught a valuable lesson on investing: investing is not a risk-free game. You can lose money.  Proceed with caution.

The technical problems that plagued Facebook’s rite of passage to public company status may have contributed to investor losses and certainly contributed to investor confusion.  NASDAQ, the exchange that won the prized Facebook IPO, encountered technical problems that contributed to the offering’s rough-and-tumble first day.  Investors were left in limbo for hours -- not sure whether their purchase, sale, or cancellation orders had been processed.  NASDAQ has admitted that, knowing what it does now, it would have delayed the IPO to address its systems issues. 

The NASDAQ software glitches were not the first problems Facebook encountered in its quest to raise capital.  A year ago, Goldman Sachs abruptly moved a private offering of Facebook shares overseas.  Apparently, the move was driven by a fear that the media coverage of the deal might have caused it to run afoul of an ill-defined SEC regulation that prevents such offerings from being advertised. 

The recently passed JOBS Act loosened this unwieldy advertising ban and took other steps to make raising capital easier in the United States.  Among other measures, the JOBS Act provides relief for companies that want to go public, including by providing temporary relief from a particularly expensive Sarbanes-Oxley provision. 

It would be a shame if the highest profile IPO since the passage of the JOBS Act leads to a new round of regulation that impedes IPOs.  The recent JP Morgan flap illustrated how readily calls for regulation come when private market participants make embarrassing mistakes. Sometimes, though, regulation is not the answer.   NASDAQ, which is in a perennial battle for listings with the NYSE and other exchanges here and abroad, is unlikely to be complacent about its technology problems. 

NASDAQ’s CEO followed the lead of JP Morgan’s Jamie Dimon by admitting his company’s mistake and pledging to do better.  NASDAQ has set aside money to compensate harmed investors and already faces at least one investor lawsuit.  There are now news reports that the NYSE is courting Facebook.  Because NASDAQ is undergoing painful market discipline for its mistake, new regulations do not seem necessary.