The Lawyering Behind Facebook's IPO

Facebook thumbs-up symbol with "cha-ching" and large asteriskToday, Facebook does its IPO - initial public offering. That means it begins offering shares of its stock for public trading on a stock exchange.

Non-lawyers out there may be wondering what is involved, legally speaking, in "going public"?

First of all, a lot. There is a ton of billable hours to be had for lawyers in an IPO. (Just look at some of the scores of documents they filed yesterday!) The kind of lawyers who work on these things are what you call "transactional lawyers," which mostly means that these are lawyers who don't practice in a courtroom.

So what do attorneys do if they don't go to court? From my law-school summers working at law firms in Manhattan, I remember senior partners in the transactional group as glorious lawyers who spent all day on the phone – swiveling freely in their chair with a wireless headset - giving advice off the top of their heads to Wall Street people. "No, Marty, you can sell fifty million of the preferred shares because the convertible debentures were issued by a less-than-50-percent-owned Delaware subsidiary. Lunch tomorrow at Le Cirque?"

Fabulous job to have.

Now, transactional associates on the other hand, particularly the junior ones, had a decidedly less glamorous existence. They were up all night, night-after-night reviewing reams of tedious documents line-by-line, letter-by-letter, comma-by-comma. Kill-me-now kind of stuff.

Do you want to see exactly what kind of thing they had to work on? Here's Facebook's S-1 (the "prospectus"), a document required to be filed with the Securities and Exchange Commission before a company makes a public offering of stock.

The law regulating the stock market in the United States was built primarily in the years following the Great Crash of 1929. To this day, the main bodies of law you will hear Wall Street lawyers talk about are the '33 Act (The Securities Act of 1933), and the '34 Act (The Securities Exchange Act of 1934). The underlying theme of these laws is protecting the public through disclosure.

If you sell stock to big firms or superrich individuals, the law doesn't care so much. But if you sell your stock to the public, thus allowing Grandpa Bob to buy it, the law freaks out, then requiring you to disclose huge volumes of information, which, the law figures, Grandpa Bob will read, so that Grandpa Bob will make wise investment choices and not lose his retirement savings.

Oh, silly law!

This is where you get the familiar phrase "Read the prospectus." It is important for you to read the prospectus if you want to see a bunch of lawyers explain how Facebook works, why it is popular, and why it will make money – nix that, will almost certainly make money - nix that again, could make money or lose money, depending on several factors, blah, blah, blah, and blah, lawyers wrote this, blah, blah, blah.

You want proof that lawyers wrote Facebook's prospectus? Just ask yourself, would anyone but a lawyer write glowing statements such as these for a company's big coming out party on Wall Street?

  • "If we fail to retain existing users or add new users, or if our users decrease their level of engagement with Facebook, our revenue, financial results, and business may be significantly harmed."
  • "We are currently, and expect to be in the future, party to patent lawsuits and other intellectual property rights claims that are expensive and time consuming, and, if resolved adversely, could have a significant impact on our business ..."
  • "We expect our rates of growth will decline in the future."
  • "We may not be successful in our efforts to grow and further monetize the Facebook Platform."
  • "Competition presents an ongoing threat to the success of our business."
  • "Our new products and changes to existing products could fail to attract or retain users or generate revenue."
  • "The risks and uncertainties described [listed here] are not the only ones we face. Additional risks and uncertainties that we are unaware of [may] adversely affect our business. ... [Y]ou could lose part or all of your investment."

Status update: OMG, buzz kill!

You know who reads S-1s? Other lawyers. In particular, litigators. Lawyers who are looking for some misstatement or some unmentioned fact that will serve as a basis for a lawsuit based on federal securities law. And then it's off to the courthouse!

So, as you can see, there's an inherent tension between transactional attorneys and litigators: When transactional attorneys screw up, it's payday for the litigators. (Actually, the tension is probably mostly because transactional attorneys are jealous of litigators getting to wear suits and going to court, and litigators are jealous of transactional attorneys getting to wear business casual and whiling away billable hours on a wireless headset.)

Now, don't get the idea that I'm trying to say federal securities law is just a permanent-employment act for lawyers. In truth, it's a good system. We've got the greatest economy in the world, and the securities laws are a key foundation of it.

Moreover, the readership of SEC filings goes beyond plaintiffs lawyers to include plenty of Wall Street analysts and traders. Granted, Wall Street people are not learning anything from the kind of legally required CYA statements that I quoted above, but the hard data disclosed by SEC filings does keep companies honest and it does help markets function efficiently.

By the way, the newspapers never seem to mention what law firms and investment banks are behind these big deals. But I will. For Facebook today, it's the Silicon Valley law firms of Fenwick & West LLP in Mountain View and Simpson Thacher & Bartlett LLP in Palo Alto. Neither are far from Facebook's Menlo Park headquarters. The investment bank on the deal is the San Francisco office of Morgan Stanley.

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