SEC had concerns about Facebook’s advertising, mobile revenue prior to IPO

Jeff Stacklin

Before Facebook was allowed to sell its shares on the public market, federal regulators had a few questions about the social media company's advertising opportunities, a strategic business partnership, and how it shared users' data, according to correspondence made public today.

After Facebook filed its initial registration statement with the Securities and Exchange Commission, agency officials sought clarity from the company in how it planned to monetize its advertising, according to a letter to the company dated Feb. 28 and made public today.

The federal agency suggested the company provide regulators—and, ultimately, potential stockholders—a detailed breakdown of the overall number of ads shown on the site, the number of advertisers, the average price per ad, revenue per user, and trends in display and performance-based advertising for each of the periods presented.

Another key issue SEC officials sought to clarify was how an increasing dependence on mobile Internet access would adversely affect the company's bottom line. They wondered:

... assuming that the trend towards mobile continues and your mobile monetization efforts are unsuccessful, ensure that your disclosure fully addresses the potential consequences to your revenue and financial results rather than just stating that they "may be negatively affected."

Regulators asked the company to disclose the number of users that primarily access Facebook via mobile apps or its mobile website, and the number of users that primarily share content or activity via an integrated third-party website.

But mobile and advertising weren't the agency's only pre-IPO concerns.

Regulators also questioned the company about its partnership with Zynga Inc., a social media gaming company. Regulators noted that Facebook generates "significant" page views (and, ultimately, advertising views) because of Zynga, and wanted to know specifically how much advertising revenue could be attributed to Zynga's games.

The SEC also wanted to know what would happen if Zynga launched games on competing sites or migrated to mobile platforms and Google Plus. Regulators noted:

You state that if Zynga launches games on or migrates games to competing platforms, you could lose Zynga as a significant platform developer and your financial results could be adversely affected.

SEC regulators also questioned the company about how much control users have over their information and who it is shared with, and specifically how advertising is targeted to users with that information.

Such questions by regulators are not uncommon. Generally, the regulators question pre-IPO companies to clarify comments made in their registration statements so that potential investors have a fuller understanding of their business operations. Although the questions are asked of companies prior to their initial stock sale, the correspondence is made public after the IPOs.

Facebook's shares have taken a dive since they first began trading on May 18 at $38, and were trading at just over $28 this afternoon, a decline of about 24 percent.