Facebook Moves to Sell Stock and Go Public

For years, the social media giant said it was interested in launching an initial public offering, or IPO, but it wasn't until this week that it took its first step toward becoming a publicly traded company.

Reports say the company will offer shares to the public in May, pending a “smooth registration process” with the agency in charge of stocks, the Securities and Exchange Commission (SEC).

Many people wonder how a public offering will affect co-founder Mark Zuckerberg and his leadership of the company.

What is an IPO?

	Companies that want to be traded on Wall Street can launch an IPO, giving public investors the opportunity to own a piece of the business.

An IPO allows public investors a chance to own a piece, or share, of a business.

Investors share the profits when the company does well, but they also share the losses when the company struggles.

Investors buy stocks because they believe the share they own today will be worth more in the future. In turn, the company gets money it needs to pay bills and grow.

The benefits of going public are many, including greater access to cash needed for growth, the use of stock options to attract and retain talented employees and prestige in the business world.

But there are drawbacks. While investors generate money, they begin to share profits and the company gets far less confidentiality when it is required to disclose certain documents on a regular basis. The company will also be under greater pressure to focus on short-term earnings goals, many times to the detriment of long-term goals. Finally, management loses some control of the company to shareholders.

Facebook will face more scrutiny

	In order to go public, Facebook made all of its financial records available to the independent government agency, the SEC.

But “public” companies that offer stock also have to follow different rules than “private” companies.
First, the company must compile its financial records, including payments to executives, money it owes, quarterly and yearly profits, and so on. It must disclose this information to the SEC for review.

The SEC is the chief regulator of stock markets in the U.S., and it has the ultimate power to decide whether Facebook can sell stock. When a company is private, like Facebook is today, it’s difficult to know how much money it’s earning or how well it’s performing during the economic recession. That would change with an IPO.

Second, the company must decide how much money it wants to raise and find investors willing to purchase its shares. It accomplishes that by using an underwriter, usually an investment bank.

The underwriter guides the company through the IPO and agrees to buy the shares from the company. It then sells those shares, or stock, to the investors. This transfers the risk from the company to the underwriter and guarantees a minimum price for the company. For this service, the underwriter collects a fee. The investors, in turn, can sell these shares on an open market or stock exchange.

How will Facebook make a profit?

	Facebook wants to make money from advertising programs like Google's, which receives 99 percent of its revenue from ads.

Facebook’s popularity has meant expensive technological upgrades so that users can upload video and pictures.

Facebook is attempting to make money through targeted ads, not unlike YouTube and Google. However, Facebook has yet to find the formula that allows it to cash in on its popularity.

“If you are living in Memphis, Tenn., and you just got engaged, Facebook knows that, and can sell an ad to the bridal shop in Memphis. And, you know, they also could sell to a broad audience of the 800 million people there. But what they haven't done is done it in a way where users hunger to see those ads and want to see them,” explains Steven Levy, a senior writer at Wired magazine.