SEC sought more facts on Facebook

SAN FRANCISCO – Questions posed to Facebook Inc. by federal regulators before its initial public offering echo investor concerns that the company didn’t disclose enough information about its business before its controversial initial public offering.

But a month after the controversial IPO, Facebook is pushing back, arguing that it made public all material information and followed the rules. The company on Friday asked a federal court in New York to consolidate more than 40 IPO-related lawsuits.

The legal motion was filed on behalf of Facebook, chief executive Mark Zuckerberg, the company’s board members and its chief underwriters, Morgan Stanley and Goldman Sachs.

Some of the concerns reflected in the complaints are amplified in letters sent to Facebook by the U.S. Securities and Exchange Commission showing the agency pushing for more disclosures on Facebook’s business, citing “disproportionate trends” in its revenue per user and the potential impact of its increasing mobile user base.

The letters were sent before the company’s May 18 IPO but were made public only this week.

The correspondence focused on Facebook’s disclosures on business trends, particularly involving its revenue stream. Facebook makes most of its money through online display advertising, mainly through PCs.

Analysts have noted that one of the company’s key problems is how to enhance its ability to make money from mobile devices, such as smartphones and tablets.

In its IPO filings, Facebook repeatedly said that its ability to make money from the mobile market was “unproven.”

But in the letters, the SEC apparently wanted the company to elaborate.

In a March 22 letter, the agency asked about Facebook’s mobile presence, pressing the company to disclose “any material trends” in that space.

The SEC also asked about overall trends related to Facebook’s growing user base and the rate at which it’s been able to monetize that user base.

In an April 10 letter, the agency noted that for December 2010 and December 2011, “average revenue per user in the U.S. and Canada and Europe regions was significantly higher than the other geographic regions, and average revenue per user in Asia and the rest of world appears to be driving down average revenue per user worldwide.”

The SEC letter indicated that Facebook responded to questions on user trends by saying it does “not ‘rely’ or ‘focus’ on calculations of average revenue per MAU (monthly active user).”

But the agency stressed that Facebook is required to disclose “description of any known trends or uncertainties that have had, or you reasonably expect will have, a material impact on operations.”

Facebook offered more color about its business in an amended filing on May 9, just nine days before its IPO.

In the amendment, Facebook noted “an increased usage of Facebook on mobile devices.” The company said it believed the trend “has contributed to the recent trend of our daily active users increasing more rapidly than the increase in the number of ads delivered.”

That revision prompted some analysts, including those affiliated with the IPO underwriters, to trim revenue estimates for Facebook.

That later triggered allegations, reflected in the lawsuits, that Facebook and its underwriters misled investors.

Facebook has rejected the allegations.