Facebook IPO grapples with government regulation
In Wednesday’s IPO filing, Facebook acknowledged that it will have to comply with the legal and regulatory burdens of becoming a public entity. Listing the various financial laws it expects to navigate as a public company, its public filing highlighted some of the high, government-imposed regulatory costs companies face when they make that hurdle.
“As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (Exchange Act), the Sarbanes-Oxley Act, the Dodd-Frank Act … and other applicable securities rules and regulations,” the filing reads.
The Dodd-Frank Act — named for Sen. Chris Dodd and Sen. Barney Frank — is recognized by many as the most comprehensive financial regulatory system overhaul since the Great Depression. It was passed in 2010 as a response to the financial crisis during the 2000s. The act introduced more regulations to the financial markets and created a new regulatory body, chaired by the Secretary of Treasury and comprised of numerous unelected bureaucrats with regulatory voting power.
Facebook wrote in its IPO filing that compliance with the rules and regulations will increase the company’s legal and financial compliance costs, “make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources.”
The company made clear that the amount of disclosure required by those laws would leave it vulnerable to “threatened or actual litigation, including by competitors and other third parties,” which could ultimately be harmful to Facebook and its operating results.
“Even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and operating results,” the company wrote.
Several laws, Facebook argued, make the company potentially subject to regulatory requirements financial institutions also have to meet.
“Various laws and regulations in the United States and abroad, such as the Bank Secrecy Act, the Dodd-Frank Act, the USA PATRIOT Act, and the Credit CARD Act, impose certain anti-money laundering requirements on companies that are financial institutions or that provide financial products and services,” the filing continued.
Facebook said that under those laws and regulations, “financial institutions are broadly defined,” and while it does not believe that it is a financial institution subject to those laws and regulations, its product, Payments, could be considered a financial product.
Because of Payments, ” we could be deemed a financial institution subject to applicable U.S., state, or foreign regulation under certain interpretations of laws governing businesses such as money transmitters, check cashers, and sellers or issuers of stored value,” said Facebook.
“To increase flexibility in how our use of Payments may evolve and to mitigate regulatory uncertainty,” Facebook stated that it has “applied or expect to apply through a subsidiary for certain money transmitter licenses in the United States.”
The licenses will generally require the company “to show compliance with many domestic laws relating to money transmission, gift cards and other prepaid access instruments, electronics funds transfers, anti-money laundering, counter-terrorist financing, gambling, banking and lending, and import and export restrictions,” Facebook wrote.
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