Scrutiny of Facebook IPO

May 23rd, 2012

Regulatory concerns over the Facebook IPO continue to grow following a lawsuit filed against the social network, CEO Mark Zuckerberg and several banks involved in the initial public offering. Law School professor Tamar Frankel, an authority on securities law, corporate government, and legal ethics, offers the following comment:

“There is nothing new under the sun and the Facebook IPO debacle is no different from the same type of distributions in the 1920s.

“To be sure, some things have changed. Congress passed the Securities Act of 1933 to preclude the ‘heating and revving up’ of investors’ markets. Section 5 of the Act prohibits public offering of securities before the details regarding the offering were filed with the Securities and Exchange Commission. This provision imposed high costs on underwriters.

“After all, why are they called underwriters? They underwrite the risk that the offering will not be sold at the offered price. Throughout the years, however, with the theories that market information is available in various ways and underwriters could address sophisticated investors by directly providing information before the public offering, the rules were relaxed.

“In addition, the rules became both numerous and specific. Numerous specific rules have two advantages. They can be more easily circumvented and, because they are numerous, one can complain bitterly (and sometimes justifiably) about the cost.

“We have seen the IPO craze before in one form and now in another, under one regime and now in another. In all cases the smaller or uninformed investors were ‘revved up’ and the favored investors were fattened up. In all cases the promise of quick riches has won too many investors.

“Investors should learn that if others make fortunes, run away as far as you can because you will pay for their fortune.”

Contact Frankel at 617-353-3773; tfrankel@bu.edu

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