New SEC filings show questions Facebook faced in IPO process

A series of new filings today disclosed a wide range of questions Facebook received from the SEC during its IPO process, including requests for greater disclosure about many of its metrics, its risks from the shift to mobile, and even the independence of its auditor, Ernst & Young.

The letters from the SEC can be found here. Facebook’s response letters can be found here.

The letters are known as “correspondence letters” and are typically filed publicly several weeks after they have been exchanged. In the first letter from the SEC, dated February 28, about four weeks after Facebook filed for its IPO, the agency raised 92 separate questions about items in (or not in) the company’s prospectus.

Over the course of the exchange, the SEC pushed Facebook to disclose its average revenue per user by geography (it’s higher in the U.S. and Canada than the rest of the world).

The exchange of those letters continue right up until the IPO. Toward the end, the SEC apparently raised questions about whether E&Y’s independence had been compromised because it did some non-audit work for Facebook. These concerns were apparently raised during phone conversations.

Facebook replied that any other work E&Y did had been approved by its audit committee:

“EY has provided certain permissible non-audit services to the Company during the periods covered by its report in the Form S-1. In the three years prior to the Company’s initial filing of its Form S-1, the Company and EY have taken steps to evaluate, consider and conclude that services requested or provided are consistent with EY’s independence.”

In other letters, SEC continued to raise concerns about whether Facebook was disclosing enough information to potential shareholders. For instance, the SEC wanted Facebook to disclose its average revenue per Monthly Average User, but Facebook pushed back:

“The Company also notes that, although average revenue per user could be calculated from the data currently disclosed in the Registration Statement, it believes providing such calculations would not be consistent with the level of importance the Company places on average revenue per user in managing its business.”

The SEC also wanted more information about Facebook’s relationship with Zynga:

“The Company advises the Staff that the contribution (of less than 5% in the fourth quarter of 2011) to revenue from ads shown to users using Zynga apps on Facebook is in addition to revenue derived from payments processing fees related to Zynga’s sale of virtual goods and direct advertising purchased by Zynga. The Company estimates that revenue from ads shown to users using Zynga apps on Facebook was approximately 7% of revenue for 2011.”

As such, the SEC wanted Facebook to make clear that the company got closer to 19 percent of its revenue from Zynga-related traffice, and suggested the following language:

“Please disclose that revenue from ads shown to users using Zynga apps on Facebook was approximately 7% of your revenue for 2011, and that this is in addition to the 12% of your 2011 revenue derived from payments processing fees related to Zynga’s sale of virtual goods and direct advertising purchased by Zynga.”

(Image by Associated Press)