Facebook IPO raises interesting legal disclosures

Companies engaging in public markets are under tremendous scrutiny as well as legal obligations to provide all material information related to the sale of those securities. In addition, beginning October 13, 2011, the SEC provided specific guidance on the types of cyber-security issues that must be disclosed to the public markets in various statements and offerings.

So it should come as no surprise that Facebook has provided the public a comprehensive blueprint for disclosure of all possible risks that might occur to a publicly traded social media enterprise in its initial IPO filing (its S-1 Registration).

In his Internet Cases blog, attorney Evan Brown noted that Facebook lists 40 risk factors. His informative blog describes six of the more interesting legal disclosures in the Facebook IPO regarding the intellectual property issues the company faces.

Among the risk factors of note were the reliance on Zynga – which accounts for 12% of company revenue, challenges of scalability, and the risk associated with the development of Facebook’s own technology.

  • We recently began to own and build key portions of our technical infrastructure, and, because of our limited experience in this area, we could experience unforeseen difficulties.

In 2011, we began serving our products from data centers owned by Facebook using servers specifically designed for us. We plan to continue to significantly expand the size of our infrastructure, primarily through data centers that we design and own.

Facebook also recognized the significant challenges created by intellectual property ownership – both as an owner of those assets trying to protect them – and as a target for others trying to cash in (since others could not be justifiably defending their own rights).

  • 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.

Companies in the Internet, technology, and media industries own large numbers of patents, copyrights, trademarks, and trade secrets, and frequently enter into litigation based on allegations of infringement, misappropriation, or other violations of intellectual property or other rights. In addition, various “non-practicing entities” that own patents and other intellectual property rights often attempt to aggressively assert their rights in order to extract value from technology companies.

Perhaps the most interesting disclosure is the attitude exhibited for rights of privacy and publicity.

  • 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.

Certainly one can understand the pressure Facebook feels to comply with privacy laws and keep up with the FTC practices that require privacy policies be respected and changes to those policies be enacted only after adequate notice.

Is it then at odds with the company to value itself at $100 billion if the value of its assets are so uncertain and complex? The risk does not seem to be diminishing the company from seeking the reward. So perhaps the risk factor serves another purpose – to suggest that any changes resulting in increased privacy protections are harmful to the economy and the country.

Either way: Buyer beware.