Must private companies tell us the truth?
Barry Ritholtz today asked if Facebook has missed its IPO window, under a theory that almost all companies have an expiration date. He quickly concludes that there will still be plenty of public demand, although the strong launch of Google+ may have “shaved some billions off the IPO price.”
Near the end of his post, Ritholtz suggests that private companies like Facebook are allowed to lie in public statements:
As a non-public company, Facebook can freely make whatever claim they choose about their business. 750 million? What the hell, sure! But once you are a public firm, one cannot make material misrepresentations to investors. Is that number truly accurate? What is the arc of activity of users? At what point do they become less active, lower time spending users? How many of those registered accounts are very active, somewhat active, neglected or dead?
It certainly is true that private companies like Facebook employ safe harbor rules to avoid most SEC scrutiny. But, at the same time, Facebook isn’t exactly a closely-held company.
The social network is fast-approaching 500 shareholders — a figure that would be far higher were underlying investors taken into account (limited partners in VC funds, retail investors in tech-focused mutual funds, foreign high-net-worth clients of Goldman Sachs, etc.). Moreover, Facebook shares have been the most heavily-traded on private market exchanges like SecondMarket and SharesPost.
As such, Facebook would be opening itself up to a world of liability were it to publicly lie about key metrics like users (let alone something more salient, such as revenue). If Mark Zuckerberg says that his company has 750 million users and I buy shares based on that information, why should it matter if the stock is publicly-listed? After all, the company effectively signs off on each trade by waiving its right of first refusal (ROFL), meaning that it is well-aware of share movement.
I’m pretty sure that financial fraud isn’t only limited to what a company says in quarterly financial statements.
To be clear, I don’t exactly see why Facebook would lie about its numbers in the first place. Would we really have been less impressed by 650 million users? But, even if Facebook wanted to exaggerate, I’m not so sure it really could…