Facebook IPO Both Breaks Records and Disappoints in Only Two Days, Offers Useful Lessons for New York and New Jersey Businesses

Facebook_HQ.jpgFacebook, the social networking website that began as a college dorm room project and grew into a multi-billion dollar corporation, in many ways embodies the dreams of small business owners and entrepreneurs. It has enjoyed explosive growth since its founding in 2004, and its service has become a feature of daily life for almost a billion people. In light of this, it may not be surprising that Facebook’s initial public offering (IPO) had very high expectations. The IPO broke records and raised billions of dollars. At the same time, the stock price failed to rise much above the initial price, disappointing many investors who hoped to see the price skyrocket.

Facebook began in a Harvard dorm room in 2003. Within a year, it had moved to Silicon Valley and acquired millions in start-up funding. The basic story of the company’s founding, with a fair amount of artistic license, is familiar to moviegoers from the 2010 film The Social Network. By the time the film came out in theaters, Facebook had over 500 million active users. By the time of the company’s IPO in May 2012, the total number of users had surpassed 900 million. This amounts to roughly three times the population of the United States and one-seventh of the world population.

On February 1, 2012, Facebook filed a registration with the Securities and Exchange Commission (SEC) for an IPO. The registration form, known as Form S-1, provides basic information for investors about the business, including the financial risks associated with investing in the IPO. Facebook’s registration declared an intention to raise $5 billion through sales of shares of common stock, but it did not say how many shares it hoped to sell or at what price. An analysis of the IPO registration by the technology blog Mashable compared the IPO’s potential earnings to those of companies like AT&T Wireless and Deutsche Telekom.

The IPO occurred on May 17, 2012 and raised $16 billion, selling over 421 million shares at $38 per share. This made it the third-largest IPO in American history, behind General Motors and Visa. It surpassed the IPO of AT&T Wireless, and it led to a total valuation of $104 billion. This made Facebook the largest company, in terms of total value, to go public.

The first full day of trading on May 18, however, brought disappointment. Shares started trading at $42.05, but had dropped to $38.23 by the end of the day, barely above the IPO price. The company reportedly broke another record that day for total volume of trades, with over 566 million shares traded. The owners and management of Facebook increased their wealth by billions of dollars, but the assessment of the IPO so far seems to be that it has not met expectations. This sort of disappointment is the risk that all businesses face when seeking to raise money, whether it is from individual investors or the public.

The New York business attorneys at Samuel C. Berger, PC offer fixed-fee packages of legal services to businesses and entrepreneurs who want to do business in New York and northern New Jersey. To speak to a member of our skilled legal team, contact us today online or at (212) 380-8117.

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Photo credit: ‘Facebook HQ’ by Steven Walling from Portland, OR, USA (Facebook HQ) [CC-BY-2.0], via Wikimedia Commons.