Here are two quick thoughts on the Facebook initial public offering:
1. The IPO structure. While it's disappointing that Facebook feels it must go the traditional IPO route, I think this is a demonstration that Wall Street still matters. Investment banks still have the best connections to institutional investors, who have the best ability to buy into a large IPO. As we saw with Google, the retail investor just doesn't have enough firepower to make an IPO of this size work.
It’s annoying that we still have to rely on Wall Street to organize capital. But it’s true.
2. Should Facebook set aside shares for users? There are rumors that Facebook may set aside some shares to be available for purchase by users. I think this is a mistake.
Buying shares in an IPO is a speculative investment that is not really appropriate for most retail investors. There’s a serious danger that the company could alienate its users if the stock price falls after the IPO. What do you do if users balk at paying up, as Vonage’s users did when its share price? Suing your own users to force them to live up to their contractual obligations is never a good idea.
Does that mean that not offering users shares will alienate them? I don’t think so.
Remember, a huge portion of Facebook users are young. Twenty percent or so are under age 18, so they aren't eligible. Another 25 percent are under 25, and don't have much wealth to invest. Seventy percent reside outside the U.S. — it would be very difficult, perhaps impossible, to arrange a sale to them. So we're only talking about a fraction of Facebook users being able to buy into the IPO.
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