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The delayed gratification of the Facebook IPO

February 1, 2012 |  5:02 pm

Mark Zuckerberg with the Facebook logo
Now that Facebook has filed the paperwork for its initial public stock offering, it's worth wondering why the company bothered. Its preliminary goal is to raise $5 billion, but its registration statement showed that it's already sitting on nearly $4 billion in cash. Meanwhile, its revenue was $3.7 billion in 2011 -- almost twice what it generated in 2010. It's net income: a cool $1 billion.

Clearly, this is not a cash-starved company.

Typically, companies go public to finance growth. And that's usually what happens; a survey of chief executives found that they created more than 90% their company's jobs after going public. But Facebook has been growing like kudzu as a closely held company, and it's had no trouble raising money through private offerings.

Instead, the real motive for the Facebook IPO seems to be enabling those early investors to cash out. Granted, they already have the ability to sell shares in the private markets that enable people to trade pre-IPO holdings. But public stock markets promise bigger gains -- in part because buyers there don't know as much about the company and aren't as realistic about its prospects. In other words, the chances are greater that buyers will pay more than the shares are worth in the long run.

There's nothing unfair about that. Nevertheless, policymakers should be troubled that Facebook and other hot tech companies are waiting so long to go public, severely limiting the number of people who benefit from their firms' explosive growth. Instead of a system that creates a handful of billionaires, wouldn't it be better to spread the risk and the potential gains among thousands, even millions, of investors?

That's not a call to redistribute Facebook's wealth. It's a call to consider the incentives that led the wealth to be so concentrated. The biggest may be the accounting, reporting and liability burdens that federal law places on public companies -- requirements that may be appropriate for well-capitalized behemoths but not for start-ups still waiting for their growth spurt.

The most burdensome of those mandates stem from Sarbanes-Oxley, the law Congress passed in 2002 in the wake of a series of high-profile securities frauds. SarbOx dramatically increased the cost of being a publicly traded company, and its enactment corresponds to a sharp reduction in the number of companies that go public. According to the accounting firm J.H. Cohn, IPOs fell by more than 75% from the 1990s to the 2000s.

President Obama has proposed giving smaller companies up to five years after their IPO before having to comply with one of the costliest provisions of SarbOx, the mandate to have annual audits of their internal accounting controls. Although the change would give investors less protection against securities fraud, it has bipartisan support. It also would enable companies to go public far earlier in their development, long before they're generating the kind of cash Facebook is. Facebook can afford to comply with the full scope of SarbOx today; five years ago, not so much.

Of course, Facebook may not have gone public any sooner even if there had been no SarbOx. By staying private, founder Mark Zuckerberg has been able to maintain tight control over his company. Then again, he'll continue to wield considerable power post-IPO because he'll hold most of the company's voting shares. According to a passage of the IPO documents unearthed by VentureBeat, Zuckerberg "has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets."


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Photo: Facebook CEO Mark Zuckerberg in 2007, a year after turning down a $1-billion takeover offer from Yahoo. He's still smiling. Credit: Paul Sakuma / Associated Press

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