Snap reveals US subpoenas on IPO disclosures

  • Snap has been subpoenaed by the U.S. Justice Department and Securities and Exchange Commission.
  • Government officials are seeking information about the company's 2017 initial public offering.
  • The development follows an ongoing shareholder lawsuit in which Snap has been accused of misleading the public about the company's growth.
CNBC Tech: Snapchat Filter 2
Todd Haselton | CNBC

The U.S. Justice Department and Securities and Exchange Commission have subpoenaed Snap for information about its March 2017 initial public offering, the social media app maker told Reuters on Tuesday.

Snap said in a statement it has responded to the government subpoenas and other requests for information.

The previously unreported federal inquiries follow an ongoing shareholder lawsuit in which investors allege that Snap misled the public about how competition from Facebook's Instagram service had affected the company's growth.

Snap said it believes that the federal regulators "are investigating issues related to the previously disclosed allegations asserted in the class action about our IPO disclosures."

"While we do not have complete visibility into these investigations, our understanding is that the DOJ is likely focused on IPO disclosures relating to competition from Instagram," the company said. Snap's Snapchat messaging app has posted disappointing user growth since the company's $3.4 billion IPO, and despite above-expectations sales growth and narrowing losses, its shares have tumbled. They closed at $6.71 on Tuesday, down from their initial offering price of $17.

The company described the lawsuit as "meritless" and said its pre-IPO disclosures were "accurate and complete." It said it would continue to cooperate with the SEC and Justice Department. Subpoenas can compel parties to provide materials that authorities want to review.

Snap acknowledged the probes after the U.S. government made a sealed filing in the shareholder lawsuit last Wednesday.

The complaint, filed in May 2017 in U.S. District Court in Los Angeles, also alleges that Snap did not disclose a sealed lawsuit brought before the IPO in which a former employee alleged the company had misrepresented some user metrics.

A federal court ordered that whistleblower case to arbitration in April. The shareholder lawsuit further alleges that Snap misrepresented its use of smartphone notifications and other "growth hacking" tactics to spur Snapchat usage.

Judge Stephen V. Wilson in June denied Snap's motion to dismiss the lawsuit.

Plaintiffs later filed to certify it as a class action. Snapchat, which reported 158 million daily users prior to the IPO, peaked at 191 million in this year's first quarter and fell to 186 million in the third quarter.

Snap's investor prospectus warned that Instagram's new ephemeral-posting feature, Stories, copied one of Snapchat's core elements and "may be directly competitive."

Investors allege that Snap underplayed the risk, contending that the company should have attributed slowing user growth in late 2016 to Instagram.