The Facebook IPO in May was a disaster.
Hyped up as the must-buy of the decade, the stock faltered as soon as it opened, and the shares then crashed more than 50% over the next few months.
IPO buyers got demolished. Facebook's reputation took a dive. Lawsuits and recriminations commenced.
The main problem with the IPO was that investors paid way too much for the stock.
Most of the responsibility for this decision, unfortunately, lies with the investors themselves. No one made anyone pay $38 a share for Facebook.
But some of the fault lies with Facebook, Facebook's bankers, and some idiotic IPO information-disclosure rules.
During the IPO roadshow, sophisticated institutional investors got important negative information about Facebook that small investors didn't get. This made the institutions much less enthusiastic about Facebook than some less-informed small investors turned out to be.
I wrote about the unfairness of this in the wake of the IPO disaster last spring. But now, thanks to an investigation by Massachusetts securities regulators, we have the blow-by-blow details on how small Facebook IPO buyers got screwed.
The Massachusetts "consent decree" tells the behind-the-scenes story of how the negative information about Facebook was shared with some investors and not others. It also shines a light on many aspects of the IPO process that still aren't well understood:
- The story shows, for example, how analyst estimates for companies going public aren't so much "estimates" but company guidance.
- It emphasizes just how big an information advantage sophisticated investors have over small investors.
- It makes a mockery of the fiction that investing is "a level playing field."
The investigation also reveals that some IPO rules should be changed immediately. I'll explain how at the end.
But first, the full story about how Facebook IPO buyers got screwed.
At the beginning of an IPO, company managers meet with research analysts to teach them about the business. Sometimes, the company gives "financial guidance," the way some public companies do.
Mark Zuckerberg did not attend this meeting, but Facebook's CFO David Ebersman did.
CFO Ebersman gave the analysts a very specific forecast for Facebook's performance. This forecast was never shared with small investors.
See the rest of the story at Business Insider
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