How Facebook’s IPO Could Transform the Capital Markets

Everyone, from the thousands of small cap underwriters who were banished from the business to the tens of thousands of people getting high in tents and occupying the nation, would agree that Wall Street is seriously broken. And Wall Street’s integrity is just as damaged as its shattered infrastructure. But while the infrastructure can be rebuilt, a tarnished reputation is irreparable. No one knows this better than my old college friend Jill who will forever be remembered as the girl who slipped herself a ruffie and found herself waking up naked between her 60 year-old biology professor and the school mascot.

But I digress.

As an eternal optimist, I believe that something beautiful will emerge from this wreckage. While Wall Street is crumbling, something epic is brewing – something that has the predominance to forever alter the face of Wall Street. That something is a Facebook IPO.

Facebook has already ignited the private markets and changed the path of capital formation. But I believe that the company, famous for transforming global communications, will utilize its sphere of influence to next revolutionize the new issue market. I predict that Facebook’s IPO entrance will be anything but predictable.

There has been some speculation that Facebook will attempt an IPO without underwriters. Given Facebook’s larger-than-life stature, its history of raising capital under its own terms and Wall Street’s PR in crisis mode, I would not be surprised to find Facebook asserting, “F*&K You, Wall Street. We can make it fairer. We can do it better.”

It wouldn’t be the first time an issuer dictated its own terms. Seven years ago Google completed its IPO via the unconventional “Dutch Auction” process. Although Google did use underwriters, they were able to wrangle the banking fees down to a mere 2.8%. But, Facebook is not one to follow in Google’s footsteps. Instead, it is a company with the wherewithal to set an entirely new precedent for bucking the Wall Street establishment.

Theoretically, the social media giant can self-underwrite its IPO and employ a method called Direct Registration to sell its shares to the general public. This contemporary technique was implemented by the DTC to allow investors to purchase their shares directly from the issuer and hold their shares in uncertificated direct registration book-entry position on the books of the transfer agent. The shares are paid for by an ACH checking account debit, eliminating the need for the purchaser to open and fund a separate brokerage account.

With this approach, Facebook can utilize its own platform to facilitate every aspect of the IPO process from marketing to distributing offering documents to obtaining indications of interest to ultimately completing the transaction. And with investors already clamoring to purchase shares, Facebook won’t need to contend with the most arduous component of the IPO process – the road show.

According to Gene Massey, CEO of MediaShares, a company that furnishes patent-protected, fully SEC-compliant Direct Registration tools, “Not only would Facebook be able to bank hundreds of millions in unspent banking fees, a Direct Registration would also allow Facebook to gather privy shareholder information that would otherwise only be accessible to its underwriters. This information on top of the immense data it already possesses could propel Facebook into becoming the most powerful marketing company in history.”

Yes, I think I may have read somewhere about Facebook’s data obsession. But how much money can Facebook actually save with a self-underwritten IPO? If, like Google, Facebook enlists the help of underwriters and negotiates a 2.8% fee, on an anticipated $10B offering, Facebook could expect to pay $280M plus another $42M upon the exercise of the green shoe. For those doing the math, the total investment banking commissions would basically equate to the same dollar amount needed for Facebook to hire nearly 3,000 more software engineers and double its employee base.

I can’t see why a company that clearly needs no marketing and is accustomed to calling its own shots would suddenly choose to relinquish control of significant demographic data and pay unnecessary banking fees. It simply doesn’t make sense considering it already possesses the infrastructure as well as a member base of 800,000,000 potential investors. Think about this – if Facebook sold just 1 share of its stock to each of its members, it could raise in excess of $30B or three times the amount that its bankers would raise by placing it in the hands of their favorite institutional clients.[i]

Here’s another thought to ponder – should Facebook’s self-underwritten IPO be triumphant, it can very well usher in the era of the social stock market. Hmmm, disrupting Wall Street as opposed to occupying it? Now that is capitalism at its best.