Facebook shares are about to start trading in New York today at $38 per share. But with the company valued at $104 billion, the largest ever valuation for an American company at flotation, what risk factors give it concern?
The filing with the SEC can be grouped into broadly similar themes. In this post I look at government legislation, liabilities and intellectual property.
17. Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.
18. We have been subject to regulatory investigations and settlements and we expect to continue to be subject to such proceedings in the future, which could cause us to incur substantial costs or require us to change our business practices in a manner materially adverse to our business.
19. If we are unable to protect our intellectual property, the value of our brand and other intangible assets may be diminished, and our business may be adversely affected.
20. 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, financial condition, or results of operations.
21. We are involved in numerous class action lawsuits and other litigation matters that are expensive and time consuming, and, if resolved adversely, could harm our business, financial condition, or results of operations.
23. We anticipate that we will expend substantial funds in connection with the tax liabilities that arise upon the initial settlement of RSUs following our initial public offering and the manner in which we fund that expenditure may have an adverse effect on our financial condition.
32. We may incur liability as a result of information retrieved from or transmitted over the Internet or posted to Facebook and claims related to our products.
34. Payment transactions on the Facebook Platform may subject us to additional regulatory requirements and other risks that could be costly and difficult to comply with or that could harm our business.
Facebook has to comply with a variety of laws, not only in the United States, but around the world. Different areas have rules on data privacy, content, marketing to children and liability for copyright infringement. These laws differ in application and stringency.
Facebook has to make sure that all laws are complied with even if the laws change in a different country.
Facebook needs to make sure that all its practices and policies are in place by carrying out internal audits and checks at regular intervals to make sure it is still compliant. If a local data protection, privacy or opt in policy changes at a local level, Facebook still needs to comply.
Facebook, like many other major companies wants to protect its intellectual property from theft and copyright by a potential competitor. As the underlying code for Facebook is written in open source, there is a chance that it could be used by another company to create a similar product.
If Facebook has to licence software under the Open Web Foundation Licence and that software is important to the Facebook platform, then there could be a lawsuit against it.
Patent lawsuits happen all the time between companies that think that another company has infringed its intellectual property rights. Significant costs are incurred on both sides to protect the intellectual property in dispute.
Apple and Android are in dispute over the slide to unlock feature on mobile phones, Microsoft and Motorola over licencing of patents. Disputes happen constantly in the software business.
Facebook is currently in dispute with Yahoo over 16 patents that Yahoo claims to hold "may be relevant" to open source technology used in Facebook's data centres. Yahoo has not started litigation, but may do so in future.
Other lawsuits from users and advertisers are also in process with Facebook to claim damages. These claims sometimes are for 'enormous monetary damages'. The cost of legally defending the claims is very high with no guarantee of a positive outcome for the business.
Facebook expects that there will be further claims made against it for information published on the platform. This becomes more complex as Facebook needs to comply with local legislation around the world. Facebook needs to investigate and defend claims as they arise in that country.
Any RSU (Restricted Stock Unit) which has already been granted before January 1st 2011 will need to be honoured with tax paid to satisfy withholding and remittance obligations. Facebook estimates this to be approximately $4billion.
Any money transmitted over the web is subject to local and international laws on money laundering, gambling, counter-terrorist financing and banking regulations. It also needs to watch for illegal or fraudulent activity and deal with it appropriately.
Facebook has to comply with all of these regulations and still make its systems work effectively.
As I said yesterday in my post on risk factors and dependence, other global companies -- especially software companies have the same challenges as Facebook does. Until the deplorable tech patent situation is fixed, software houses will continue to need vast reserves of cash to fight litigation.
Until then, the real winners of the patent tussle are the lawyers.
- Facebook IPO: Risk Factors and growth
- Facebook IPO: Risk Factors and dependence
- We must fix the deplorable tech patent situation
- Facebook's IPO- The social business implications
- Facebook IPO- Final numbers