New Zealand: Facebook vs Trade Me - a tale of two disclosures

Brief Counsel

Facebook's market debut last week in the United States raises comparisons in the New Zealand context with Trade Me's IPO in November last year.

This Brief Counsel compares aspects of the relevant disclosure documents, and offers some observations on the differing approaches to risk factor disclosure.

Introduction

The IPOs of Facebook and Trade Me have attracted widespread interest and media commentary, not least because both companies have a history of innovation and rapid growth in their respective markets.

And, although they operate different business models, both invite the same fundamental question: will their current market dominance be diminished by competitors or new technology, given the constantly changing nature of the internet and online interaction?

In light of these parallels, it is interesting to compare the risk analysis relating to each IPO - particularly given the on-going reform of New Zealand's capital markets regulation and the revised Guidance Note on effective disclosure which the Financial Markets Authority released last month.

It should be noted at the outset that both disclosure documents are consistent with prevailing market practice in their respective jurisdictions.

Current New Zealand law requires an investment statement to contain a brief description of the 'principal risks' related to the investment, and an equity IPO prospectus to contain a description of 'special trade factors and risks' that are not likely to be known or anticipated by the general public, and could materially affect the prospects of the issuing group.

Nothing in this Brief Counsel is intended to imply that Trade Me's disclosure does not comply with these requirements or is in any other way deficient.

Facebook

Facebook's S-1 filing to the U.S. Securities and Exchange Commission contains 39 separate risk factors related to Facebook's business and to the industry in which it operates, taking up over 17 pages.

Most of these risks stem from the fact that 85% of the company's revenue in 2011 related to third party advertising on Facebook – unlike Trade Me, which derives most of its income from fees charged to its community of members.

Around half of Facebook's users access the website through mobile devices. Yet, not only has Facebook historically not served ads in its mobile applications but, perhaps even more fundamentally, it does not control the mobile operating systems that it will rely on for increased user growth and engagement.

Facebook's disclosure is clear about these challenges:

...However, we do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven... If users increasingly access Facebook mobile products as a substitute for access through personal computers, and if we are unable to successfully implement monetization strategies for our mobile users, or if we incur excessive expenses in this effort, our financial performance and ability to grow revenue would be negatively affected.

...There is no guarantee that popular mobile devices will continue to feature Facebook, or that mobile device users will continue to use Facebook rather than competing products. We are dependent on the interoperability of Facebook with popular mobile operating systems that we do not control, such as Android and iOs, and any changes in such systems that degrade our products' functionality or give preferential treatment to competitive products could adversely affect Facebook usage on mobile devices...

The S-1 also includes a specific risk factor on Facebook's relationship with Zynga which, again, pulls no punches:

In 2011 and the first quarter of 2012, Zynga directly accounted for approximately 12% and 11%, respectively, of our revenue, which was comprised of revenue derived from Payments processing fees related to Zynga's sales of virtual goods and from direct advertising purchased by Zynga. Additionally, Zynga's apps generate pages on which we display ads from other advertisers; for 2011 and the first quarter of 2012, we estimate that an additional approximately 7% and 4%, respectively, of our revenue was generated from the display of these ads...If the use of Zynga games on our Platform declines for these or other reasons, our financial results may be adversely affected.

Trade Me

Trade Me's disclosure on risk factors is more concise – two pages comprising 14 Trade Me Group specific risks in total. Compared to Facebook, Trade Me's risk factors tend to focus on broad trends, rather than specific competitors or technology challenges, and there is less emphasis on specific sources of revenue. Consider, for example, the risk factors below which deal with the threat of disruptive models or technology changes, and changes in consumer habits:

Emerging technologies may create additional competition in the future. Online and mobile technology continues to advance and this may affect Trade Me's ability to retain its existing community of members, maintain and increase its existing level of listings, or implement its growth strategies...Competitors may take a different approach to Trade Me in relation to technology changes and thereby secure an advantage which could adversely affect Trade Me's financial performance.

... In addition, a significant portion of Trade Me's revenue is derived from advertising as it takes advantage of the continued shift away from traditional mediums like print and radio. However, if the expected trend toward online advertising did not materialise, this could also have an adverse effect on the Group.

Facebook, by contrast, is at pains to spell out exactly where it perceives its competitive threats to lie (mentioning Google+ and other competitors by name, and explaining its reliance on Android and iOs), and is specific as to certain sources of revenue (e.g. Zynga).

This may well reflect Facebook's dependence on advertising revenue and particular customers such as Zynga, and clearly identifiable, specific threats to that revenue source, compared with the more "generic" threats facing Trade Me.

Chapman Tripp comments

The Trade Me and Facebook comparison illustrates some of the differences in the approach to risk factor disclosure in New Zealand and the United States. Whether one approach is 'better' than the other is a difficult question.

The U.S. approach may reflect the audience (predominantly investment advisors and other professionals, as opposed to the primarily 'mum and dad' audience for many New Zealand prospectuses), and the much higher risk of investor class actions in the U.S. than in New Zealand.

It also reflects the much larger dollar figure involved. There is little doubt that the cost of preparing the Facebook S-1 will have dwarfed the cost of preparing the Trade Me prospectus. Would there have been a Trade Me IPO at all if it had involved comparable costs?

For the New Zealand market, the key issue is whether current practice adequately advances the twin objectives of alerting potential investors to specific risks, and protecting the issuer from risks of liability based on misstatements or omissions in disclosure documents.

Whether these objectives are achieved will very much depend on how the FMA, issuers and their advisers interpret the FMA's proposed good practice guidance that disclosure documents be "clear, concise and effective". This standard is the proposed new test in the Financial Markets Conduct Bill.

The Facebook S-1 is available here and the Trade Me Investment Statement and Prospectus here.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Roger Wallis
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions