snapchat's ipo

Snapchat’s IPO: Fanning Flames Or Blowing Hot Air?

Linkilaw Business News

There is big news coming from the startup world with accusations that Snapchat has intentionally tried to boost the value of its IPO. The aim with such manipulation is to get as much investment into the company as possible during Snapchat’s IPO but with such allegations lingering, it may end up being detrimental to the company’s chances.

In this post, we’re going to take a closer look at Snapchat’s IPO and the allegations surrounding it. We’ll also explore some potential ramifications for Snapchat’s IPO if the allegations are proven to be true.

Has Snapchat Inflated Its IPO?

Snap Inc, responsible for creating the instant photo sharing app Snapchat, has revolutionised the social media landscape; but not without controversy. The popularity of the app and the strategic aims of the executives led to Snapchat turning down a $3 billion (£2.39 billion) acquisition offer from Facebook.

Against the backdrop of a possible $25 billion IPO, Snapchat has been accused of lying about its user numbers to deceive investors and inflate its valuation. No doubt that startups and entrepreneurs alike will be following this story because the ramifications for Snapchat’s IPO could be huge.

Who’s The Source Of The Speculation?

These accusations were triggered by a former employee, Anthony Pompliano, alleging that Snapchat misrepresented its internal numbers about users and growth because of the extreme greed of a “small group of executives”, who hope for a huge valuation. Pompliano is seeking an injunction and monetary relief, alleging wrongful termination on the grounds of refusing to cooperate. The suit states:

“Snapchat will not let anything stand in its way of an IPO, including its obligations to represent material facts accurately…Mr Pompliano was terminated because he refused to participate in a scheme to deceive the public and artificially inflate Snapchat’s valuation in anticipation of its IPO.”

What’s Snapchat Saying?

These accusations have been dismissed by Snap, dismissing Pompliano’s accusations as those of a disgruntled former employee and maintains its position that Pompliano has “no merit” and was dismissed due to “incompetence”.

Pompliano, the one-time head of Snap’s growth and user engagement team, alleges that he was fired for cause after trying to bring attention to systematic misrepresentation of the company’s internal key performance metrics. In turn, this inflated valuation has allegedly been utilised to attract investment from investors such as Alibaba, in an effort to bolster Snapchat ahead of the planned IPO.

The timing of Pompliano’s departure and the announcement of an IPO gives weight to these allegations. According to the court document, Snapchat fired Pompliano after he raised concerns about the metrics with executives internally and urged the company to correct its errors.

What If It’s True? What Are The Ramifications For Snapchat’s IPO?

Snapchat’s IPO could raise to be $4 billion, which could value the company at more than $25 billion. However, if Pompliano’s accusations are correct, this investment has been encouraged through misrepresentation, which is illegal, could seriously damage Snap’s reputation and future growth.

In 2012, Facebook went through an IPO and faced similar allegations. The result? A marked drop in user and investor confidence. Most importantly however two class-action lawsuits were filed by shareholders. This case is still ongoing after a federal judge said shareholders could pursue their case against the social network, but does give an indication of Snaps future of the veracity of the claims is proven. Whether or not there is truth in the allegations, the value of the IPO will be incredibly interesting and could come to define the investment potential of social media brands.

Lessons To Be Learned From Snapchat’s IPO

A clear lesson to be learned for every company here is to make sure that you’re following all regulations and laws regarding IPO’s. The last thing you need are allegations of stock fraud that could derail your business.

Need some solid legal advice on taking your company public? Then request your free Startup Legal Session today by clicking the image below.

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