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At the time of its IPO, Facebook had three venture investors on its seven-member board:  Accel Partners’ Jim Breyer, Founders Fund partner and angel investor Peter Thiel and Andreessen Horowitz’s Marc Andreessen. Now, all three are named as individual defendants in at least one class action lawsuit filed in federal court in New York, alleging that they signed a prospectus that contained “untrue statements of material facts” and failed to publicly disclose downward revisions for earnings forecasts, which were given only to “a handful of preferred investor clients.”

As it turns out, two of those VC board members – Breyer and Thiel – also sold stakes in the IPO, which they increased significantly several days before the May 18 offering.

Accel made $1.86 billion in Facebook’s IPO and still holds 152.3 million shares of stock in the social network. The firm increased the number of shares it contributed by 28% in the two weeks leading up to the debut, according to a May 16 filing with the Securities and Exchange Commission. Thiel and Founders Fund, meanwhile, sold 16.8 million shares, a 117% increase above what they had planned to sell two week earlier. They hold 27.9 million shares. Among the VC board members, only Andreessen Horowitz, which has 6.6 million shares, did not sell any stock in the offering.

Now, on the face of it, the decision of Facebook’s VCs to stay on the board through the offering isn’t anything unusual. True, many VCs do step down in advance of an IPO, as was the case late last year for Foundry Group’s Brad Feld, who departed Zynga’s board a month before the gaming company’s December offering. But staying is commonplace. For instance, Sequoia Capital’s Michael Moritz and Greylock’s David Sze are still on LinkedIn’s board, and Accel’s Kevin Efrusy remained a director at Groupon through its IPO before announcing in April that he will step down. Moreover, the Facebook VC directors are all experienced public company board members, with Breyer mostly famously associated with Walmart, Andreessen with Netscape, and Thiel with Paypal.

Nor is selling shares in an offering anything remarkable. Though it’s more common for VCs to hold all their shares, they often sell some in the offering. A survey of the six venture-backed IPOs immediately prior to Facebook, for instance, showed that for two of them – Envivio, a developer of video delivery systems, and Proofpoint, an email security provider – VCs unloaded shares. As for the three biggest pre-Facebook social media IPOs – LinkedIn, Groupon and Zynga – only Zynga had venture investors selling shares in the initial offering.

But while staying on the board post-offering and selling shares during an IPO are relatively common behaviors, they’re not always wise. In particular, conflicts of interest – or the appearance of them – can arise when VCs seek to exit stakes and serve out board terms at the same time. Staying on the board also means a VC may be named in lawsuits filed following the IPO. Given the number of securities class action filed each year, the possibility of being a defendant in one is not remote.

So what’s the appropriate course of action? I wasn’t able to track down an attorney or VC willing to talk on the record about the Facebook situation. But Craig Miller, a partner at Manatt, Phelps & Phillips, offered some more general suggestions for VCs in determining when is the appropriate time to give up a board seat.

“I would recommend that the venture fund investors step down from the board prior to the public offering,” Miller says. This doesn’t need to be done as soon as the company files to go public, since not all filings culminate in an IPO. However, he says, the VC board member should be ready to step down when the registration statement is effective, and it’s pretty clear the IPO is a go.

For VCs who stay on the board, it’s key to keep in mind that they have fiduciary duties to two parties: the portfolio company and limited partners in their fund. Those duties consist of three parts: a duty of care, a duty of loyalty, and a duty of good faith. More often than not, Miller adds, fiduciary duties to limited partners and portfolio companies are aligned. Both, after all, want to maximize shareholder value by building a successful company. But there are situations where they may conflict. For instance, if a company is seeking outside funding at terms that could impact prior venture investors, the VC board member should generally step aside in that decision-making.

What about balancing what’s good for the company in the short term and what’s best in the long term, I asked. For instance, what if VCs seeking to exit their investments make decisions that inflate the value of the company in the near-term, but cause damage down the road?

At the end of the day, directors must always be acting with care toward portfolio companies, Miller says, adding that he’s not aware of a case involving such charges. Because directors are presumed to be acting in the best interest of companies, he adds, they’re protected by the business judgment rule, which essentially requires a board member to show their decision was the result of a reasoned judgment.

Miller’s advice on balancing fiduciary duties is pretty much in line with a white paper published five years ago by a group of venture capitalists led by Levensohn Ventures’ Pascal Levensohn. The paper, entitled “A Simple Guide to the Basic Responsibilities of a VC-Backed Company Director,” advises that “the legal fiduciary duties associated with board service are duties to all of the shareholders, not just to the shareholder class in which a VC director’s firm has made an investment.” The paper also recommends that “VCs should openly address their expectations regarding a liquidity event” and that the board “should openly discuss the timeframes for exit options.”

Even in the event of a lawsuit, it’s unlikely venture firms will pay out of pocket for partner/board members who are named in suits as board members, Miller adds. Typically, they are covered under a portfolio company’s directors and officers insurance.

Image: Reuters

Shares of Oslo-listed Opera, coveted for its advanced mobile phone software technology, jumped as much as 26 percent, valuing the firm at over $800 million.

Opera’s mobile technology, along with 170 million Opera Mini users, give the firm extensive commercial relationships with mobile phone manufacturers and operators.

Facebook has struggled to convert its rapidly increasing traffic from mobile platforms to revenue, and purchasing Opera would be a faster solution than building its own platform or browser, analysts added.

“Opera would be sensible for Facebook on several levels as it would enhance the now limited mobile experience of Facebook, improve Facebook’s mobile monetization problem, help Facebook retain online game developers leaving the social network over a lacking mobile platform and further improve Facebook’s ability to target ads,” Arctic Securities said.

It would be such a perfect fit for Facebook, analysts said it would have to pay a hefty premium.

DNB, Norway’s top bank, said the price would have to be double Friday’s closing level, or 68.6 crowns, valuing the firm at $1.35 billion, while Danske Bank predicted a price between 50 and 60 crowns a share, or between $1 billion and $1.2 billion.

At 1021 GMT, the stock traded up 16.9 percent at 40.1 crowns a share, valuing the firm at around $800 million.

Opera officials have repeatedly declined to comment.

Still, several obstacles remain.

Opera founder and top shareholder Jon S. Von Tetzchner said the firm should focus on organic growth.
“I want Opera to focus on growth and delivering good results; there are big opportunities for Opera,” Tetzchner, who holds 10.9 percent of Opera told Reuters. “We have been promised 500 million users by 2013 and I think that’s a good goal and the firm should keep going for it.”

“I personally think that an ARPU (average revenue per user) goal of $1 is even modest,” he said. “I am not pushing for a takeover.”

Tetzchner said he was not aware of a bid and had not decided how he would react to one but added it would be “undemocratic” for him to try to block it if others supported it.

Another obstacle could be Google, which has extensive relationships with Opera.

“A takeover by Facebook will likely send cold water down Google’s spine,” Arctic Securities said.

Google is Opera’s default search partner for Opera Mini and Opera Mobile worldwide outside Russia/CIS, making the firm a key relationship for Google.

If the firm continued to grow organically, it would be able to maintain several parallel relationships with firms like Facebook and Google so if one of them wanted full control, the premium would have to be hefty, analysts added.

(By Joachim Dagenborg and Balazs Koranyi; editing by Hans-Juergen Peters and Helen Massy-Beresford)

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And why not? The firm made $1.86 billion in Facebook’s IPO last week and still holds 152.3 million shares of stock in the social network. Despite the troubles plaguing the company’s long anticipated debut on Wall Street, the position is worth almost $4.9 billion.

Yet Accel was far from the most aggressive insider selling shares in the offering. The firm increased the number of shares it contributed 28% in the two weeks leading up to the debut, according to a May 16 filing with the Securities and Exchange Commission. But Tiger Global Management increased its allotment 596%. And early investor Peter Thiel and Goldman Sachs both increased theirs 117%. Accel partner Jim Breyer is a member of Facebook’s board of directors, along with Thiel.

Facebook initially set out to sell 337.4 million shares to the public, according to an S-1 the company filed with the SEC on May 3. Two days before the IPO, it increased the amount to 421.2 million, with the additional shares coming from shareholders, not the company, according to the May 16 SEC filing. The company’s contribution to the offering – 180 million shares – stayed unchanged.

The shareholders stepping up most aggressively to sell stock include Tiger, Thiel, Accel, but also DST Global and Mail.ru, according to the May 16 filing. Greylock Partners also modestly increased its allotment.

Insiders selling stock can sometimes signal worries about a company’s prospects or valuation. And certainly with the controversy engulfing the offering and Facebook’s growth expectations, its shares reflect those concerns. Just today, a group of investors filed suit against the company and its underwriters claiming it was misled, and fresh questions arose about the decision to increase the offer’s size. To date, Facebook, its underwriters, and Nasdaq have all been hit with lawsuits stemming from the IPO.

With the finger pointing likely to continue for some time, here are the details of who most aggressively exited the stock at IPO:

• Tiger Global Management sold 23.4 million shares, a 596% increase from the 3.4 million it anticipated selling as of the May 3 filing. The firm was the most aggressive seller. It still holds 30.4 million shares.
• Goldman Sachs sold 28.7 million shares, a 117% increase from the 13.2 million it expected to sell as of May 3. Goldman still holds 37.3 million shares.
• Thiel and his Founders Fund sold 16.8 million shares, a 117% increase above the 7.7 million they expected to sell as of May 3. They hold 27.9 million shares.
• Yuri Milner’s DST Global sold 45.7 million shares, a 74% increase from the 26 million it expected to sell as of May 3. Milner’s Mail.ru also sold 19.6 million, also an increase of almost 74%. DST holds 85.6 million shares and Mail.ru, 36.8 million.
• Accel sold 49 million, an increase of 28%. It holds 152.3 million shares.
• Greylock’s increase in shares sold was 8.7%. It sold 7.6 million shares and holds 29 million.

Shareholders who didn’t increase their allotments include co-founder Mark Zuckerberg, Elevation Partners, Meritech Capital Partners, and Reid Hoffman, a Greylock partner and LinkedIn co-founder.

Photo courtesy of Shutterstock.

Provided by arindambanerjee / Shutterstock.com

The defendants, who also include Facebook Chief Executive Officer Mark Zuckerberg, were accused of concealing from investors during the IPO marketing process “a severe and pronounced reduction” in revenue growth forecasts, resulting from increased use of its app or website through mobile devices. Facebook went public last week.

The lawsuit was filed in U.S. District Court in Manhattan on Wednesday, according to a law firm for the plaintiffs. A day earlier, a similar lawsuit by a different investor was filed in a California state court, according to a law firm involved in that case.

In the New York case, shareholders said research analysts at several underwriters had lowered their business forecasts for Facebook during the IPO process, but that these changes were “selectively disclosed by defendants to certain preferred investors” rather than to the public generally.

“The value of Facebook common stock has declined substantially and plaintiffs and the class have sustained damages as a result,” the complaint said.

Representatives of Facebook and Morgan Stanley did not immediately respond to requests for comment.

Facebook shares fell 18.4 percent from their $38 IPO price in the first three days of trading, reducing the value of stock sold in the IPO by more than $2.9 billion.

(Reporting by Dan Levine in San Francisco and Jonathan Stempel in New York; Editing by Gerald E. McCormick and Lisa Von Ahn)

Image Provided by arindambanerjee / Shutterstock.com“>arindambanerjee / Shutterstock.com

Facebook decided to tell analysts to cut estimates due to feedback during the investor roadshow which revealed users were opting for mobile devices which generate less advertising revenue and after consulting with its adviser Morgan Stanley.

“Facebook backed off and said, ‘Hey get your models down.’” said a person at one of the underwriters with knowledge of the situation.

Facebook’s advisory came around May 9, the day it published an amended prospectus that included a cautionary note about lower advertising revenue.

It isn’t known which analysts from the 33 IPO underwriters were contacted by Facebook with the revised guidance. It also isn’t clear exactly who from Facebook gave the guidance.

As previously reported by Reuters, the analysts for lead underwriter Morgan Stanley and at least three other underwriters in the following days reduced their forecasts for Facebook’s second-quarter and full year revenue, and communicated this to at least some of their institutional clients.

Two U.S. financial regulators will review Facebook’s initial public offering (IPO) after it closed flat on float and plunged 11 percent on Monday. Facebook shares closed 8.9 percent lower on Tuesday at $31, shedding more than $19 billion in market capitalization from its $38-per-share offering price last week.

Morgan Stanley says it did nothing wrong in the Facebook IPO. Two sources said Morgan Stanley advised Facebook to urge analysts to lower forecasts.

“Morgan Stanley bankers were telling the company how to handle the research analysts,” said a source from one of the underwriting firms with knowledge of the situation.

“Facebook changed the numbers–they didn’t forecast their business right and they changed their numbers and told analysts,” said another source at one of the underwriters with knowledge of the situation.

“The analyst’s underwriters then all changed their numbers based on what management was telling them.”

Officials at Facebook declined to comment. Morgan Stanley released a statement saying it followed the same procedures with Facebook that it does for all IPOs. “These procedures are in compliance with all applicable regulations,” spokesman Pen Pendleton said in the statement.

The bank declined to speak to the question of whether it advised Facebook to give detailed guidance to analysts based on the revised prospectus. Morgan Stanley said it provided the revised prospectus, though not the new earnings forecasts, to all retail and institutional investors.

“In response to the information about business trends, a significant number of research analysts in the syndicate who were participating in investor education reduced their earnings views to reflect their estimate of the impact of the new information. These revised views were taken into account in the pricing of the IPO,” the Morgan Stanley statement said.

Federal and state regulators said Tuesday that they were looking into various issues surrounding the Facebook IPO, including whether big investors got key information that was not available to all investors.

For Facebook and Morgan Stanley, news about the revised projections has further undermined confidence in the social media company’s shares.

(Reporting by Olivia Oran and Nadia Damouni. Editing by Alwyn Scott, Jonathan Weber and Martin Howell and Michael Perry)
Image Credit: Mark Zuckerberg by Yuriko Nakao of Reuters

Sources said it isn’t likely Versant will match its last fund’s size—a whopping $500 million vehicle—and that a realistic target for the VC is closer to half that for Fund V.

This isn’t to say lowered expectations should reflect poorly upon the fund. All across the health care, biotech and life sciences spectrum of the venture capital industry, general partners bemoan the lack of access to capital, even as reports suggest LPs are right to steer top-tier.

Versant also has to contend with changes in management. As Xconomy already reported, Cami Samuels is stepping away from the fund’s next vintage. Coming to Versant is Guido Magni, who joined the firm as a venture partner earlier this year to work on biotechnology development investments in Europe. Sources tell peHUB that Versant’s GP structure will be substantially altered by the time it announces its next fund.

Return data for Versant wasn’t immediately available; prior LPs in Versant funds include the Pennsylvania State Employees’ Retirement System and the Pennsylvania Public School Employees Retirement System, according to Thomson Reuters data.

Versant’s geneology includes a 2008 $500 million fund (IV); a 2005 $400 million fund (III); a 2001 $400 million vehicle (II) and, in 1999, its initial fund, a $250 million debut, Thomson Reuters data shows.

Recent wins for the VC include exits of ForteBio and Amira Pharmaceuticals, bought by strategics in late 2011, and the IPO of Clovis Oncology, which has performed well in the months following its debut on Nasdaq.

Image Credit: Shutterstock.com

The sudden caution very close to the huge initial public offering, and while an investor roadshow was underway, was a big shock to some, said two investors who were advised of the revised forecast.

They say it may have contributed to the weak performance of Facebook shares, which sank on Monday – their second day of trading – to end 10 percent below the IPO price. The $38 per share IPO price valued Facebook at $104 billion.

The change in Morgan Stanley’s estimates came on the heels of Facebook’s filing of an amended prospectus with the U.S. Securities and Exchange Commission (SEC), in which the company expressed caution about revenue growth due to a rapid shift by users to mobile devices. Mobile advertising to date is less lucrative than advertising on a desktop.

“This was done during the roadshow – I’ve never seen that before in 10 years,” said a source at a mutual fund firm who was among those called by Morgan Stanley.

JPMorgan Chase and Goldman Sachs, which were also major underwriters on the IPO but had lesser roles than Morgan Stanley, also revised their estimates in response to Facebook’s May 9 SEC filing, according to sources familiar with the situation.

Morgan Stanley declined to comment and Devitt did not return a phone message seeking comment. JPMorgan and Goldman both declined to comment.

Typically, the underwriter of an IPO wants to paint as positive a picture as possible for prospective investors. Investment bank analysts, on the other hand, are required to operate independently of the bankers and salesmen who are marketing stocks – that was stipulated in a settlement by major banks with regulators following a scandal over tainted stock research during the dotcom boom.

The people familiar with the revised Morgan Stanley projections said Devitt cut his revenue estimate for the current second quarter significantly, and also cut his full-year 2012 revenue forecast. Devitt’s precise estimates could not be immediately verified.

“That deceleration freaked a lot of people out,” said one of the investors.

Scott Sweet, senior managing partner at the research firm IPO Boutique, said he was also aware of the reduced estimates.

“They definitely lowered their numbers and there was some concern about that,” he said. “My biggest hedge fund client told me they lowered their numbers right around mid-roadshow.”

That client, he said, still bought the issue but “flipped his IPO allocation and went short on the first day.”

Sweet said analysts at firms that are not underwriting IPOs often change forecasts at such times. However, he said it is unusual for analysts at lead underwriters to make such changes so close to the IPO.

“That would be very, very unusual for a book runner to do that,” he said.

The lower revenue projection came shortly before the IPO was priced at $38 a share, the high end of an already upwardly revised projected range of $34-$38, and before Facebook increased the number of shares being sold by 25 percent.

The much-anticipated IPO has performed far below expectations, with the shares barely staying above the $38 offer price on their Friday debut and then plunging on Monday.

Companies do not make their own financial forecasts prior to an IPO, and underwriters are generally barred from issuing recommendations on the stock until 40 days after it begins trading. Analysts often rely on guidance from the company in building their forecasts, but companies doing IPOs are not permitted to give out material information that is not available to all investors.

Institutions and major clients generally enjoy quick access to investment bank research, while retail clients in many cases only get it later. It is unclear whether Morgan Stanley only told its top clients about the revised view or spread the word more broadly. The firm declined to comment when asked who was told about the research.

“It’s very rare to cut forecasts in the middle of the IPO process,” said an official with a hedge fund firm who received a call from Morgan Stanley about the revision.

(By: Alastair Barr, editing by Jonathan Weber, Martin Howell and Ian Geoghegan)

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