Before our initial public offering, there has not been a public market for shares of our Class A common stock. Future sales of substantial amounts of shares of our common stock, including shares issued upon the settlement of restricted stock units (RSUs) and exercise of outstanding options, in the public market after our initial public offering, or the possibility of these sales occurring, could cause the prevailing market price for our common stock to fall or impair our ability to raise equity capital in the future.
After our initial public offering, we will have outstanding 598,396,119 shares of our Class A common stock and 1,539,688,918 shares of our Class B common stock, based on the number of shares outstanding as of March 31, 2012. This includes 337,415,352 shares that we and the selling stockholders are selling in our initial public offering, which shares may be resold in the public market immediately following our initial public offering, and assumes no additional exercise of outstanding options (other than the partial exercise of an outstanding stock option to purchase 120,000,000 shares of Class B common stock held by Mr. Zuckerberg, resulting in the issuance of 60,000,000 shares of our Class B common stock as described elsewhere in this prospectus). Shares of our Class B common stock are convertible into an equivalent number of shares of our Class A common stock and generally convert into shares of our Class A common stock upon transfer.
The 1,800,669,685 shares of common stock that were not offered and sold in our initial public offering as well as shares underlying outstanding RSUs and shares subject to employee stock options will be upon issuance, “restricted securities,” as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act, which are summarized below.
As a result of the lock-up agreements and market standoff provisions described below and subject to the provisions of Rules 144 and 701 under the Securities Act, these restricted securities will be available for sale in the public market as follows:
• on the date of this prospectus, none of these restricted securities will be available for sale in the public
market;
• 91 days after the date of this prospectus, 171,797,666 shares held by the selling stockholders other than
Mr. Zuckerberg;
• 151 to 180 days after the date of this prospectus, approximately 137 million shares underlying net-
settled Pre-2011 RSUs held by our directors and then current employees and approximately 55 million outstanding shares and approximately 55 million shares subject to stock options held by then current employees other than Mr. Zuckerberg;
• 181 days after the date of this prospectus, 1,338,453,216 outstanding shares and approximately 18
million shares underlying other net-settled Pre-2011 RSUs;
• 211 days after the date of this prospectus, 141,776,569 shares held by the selling stockholders other
than Mr. Zuckerberg; and
• 366 days after the date of this prospectus, 93,815,940 shares held by Mail.ru Group Limited and DST
Global Limited and their respective affiliates.
In addition, as of March 31, 2012, options to purchase 49,390,599 shares of Class B common stock held by former employees were outstanding and fully vested and the Class B common stock underlying such options will be eligible for sale 181 days after the date of this prospectus. Furthermore, following our initial public offering, the remaining 60,000,000 shares subject to the partially exercised stock option held by Mr. Zuckerberg will be eligible for sale 181 days after the date of this prospectus. We expect an additional approximately 2 million shares of Class B common stock to be delivered upon the net settlement of RSUs between the date of the initial settlement of RSUs described above and December 31, 2012 will be eligible for sale in the public market immediately following settlement.
Rule 144
In general, under Rule 144 as currently in effect, once we have been subject to public company reporting requirements for at least 90 days, a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates, is entitled to sell those shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then that person is entitled to sell those shares without complying with any of the requirements of Rule 144.
In general, under Rule 144, as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell upon the expiration of the lock-up agreements described below, within any three- month period beginning 90 days after the date of this prospectus, a number of shares that does not exceed the greater of:
• 1% of the number of shares of common stock then outstanding, which will equal
approximately 21,380,850 shares immediately after our initial public offering, or
• the average weekly trading volume of the common stock during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to such sale.
Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.
Rule 701
In general, under Rule 701 as currently in effect, any of our employees, consultants or advisors who purchase shares from us in connection with a compensatory stock or option plan or other written agreement in a transaction before the effective date of our initial public offering that was completed in reliance on Rule 701 and complied with the requirements of Rule 701 will, subject to the lock-up restrictions described below, be eligible to resell such shares 90 days after the date of this prospectus in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, contained in Rule 144.
Lock-Up Agreements and Market Standoff Provisions
Our officers, directors, employees, and substantially all of our stockholders have agreed with the underwriters or us, not to dispose of any of our common stock or securities convertible into or exchangeable for shares of our common stock for specified periods of time after the date of this prospectus, except with the prior written consent of Morgan Stanley & Co. LLC or us, as applicable. Under the terms of their lock-up agreements with the underwriters, the selling stockholders, other than Mr. Zuckerberg, are eligible to sell up to 171,797,666 shares of our common stock in the aggregate on the date that is 91 days after the date of this prospectus, up to 839,647,187 shares of our common stock in the aggregate on the date that is 181 days after the date of this prospectus, and the remaining shares of our common stock held by them 211 days after the date of this prospectus. Under the terms of their lock-up agreement with the underwriters, our directors, our executive officers, and certain stockholders not selling shares in this offering are eligible to sell shares of our common stock 181 days after the date of this prospectus, subject to certain exceptions as described in “Underwriting.” All other holders of our common stock, RSUs and options have previously entered into market standoff agreements with us not to sell or otherwise transfer any of their common stock or securities convertible into or exchangeable for shares of common stock for a period that extends through 180 days after the date of this prospectus. We intend to waive this provision to allow our directors and then current employees to sell shares held by them or
shares subject to RSUs or stock options on a date that is between 151 and 180 days after the date of this prospectus. In addition, Mail.ru Group Limited and DST Global Limited and their respective affiliates have entered into an agreement with us to not sell their shares for certain periods of time ranging from 90 days to 365 days following the date of this prospectus. See “Related Party Transactions—Conversion Agreement” for additional information about this agreement.
In addition, we have agreed with our underwriters not to sell any shares of our common stock or securities convertible into or exchangeable for shares of our common stock for a period of 180 days after the date of this prospectus, subject to certain exceptions, including an exception that would permit us to raise capital in an underwritten offering to fund our tax withholding and remittance obligations in connection with the initial settlement of RSUs granted prior to January 1, 2011. Morgan Stanley & Co. LLC may, with our prior written consent, at any time, waive these restrictions.
See “Underwriting” for a more complete description of the lock-up agreements that we and our directors, executive officers, and the selling stockholders have entered into with the underwriters.
Registration Rights
Upon the closing of our initial public offering, certain holders of shares of our Class A common stock (including such shares of Class A common stock issuable upon conversion of our Class B common stock) will be entitled to rights with respect to the registration of the sale of these shares under the Securities Act. Registration of the sale of these shares under the Securities Act would result in these shares becoming fully tradable without restriction under the Securities Act immediately upon the effectiveness of the registration, except for shares purchased by affiliates. See “Description of Capital Stock—Registration Rights” for additional information.
Registration Statement
We intend to file a registration statement on Form S-8 under the Securities Act covering all of the shares of common stock subject to RSUs and options outstanding, as well as reserved for future issuance, under our stock plans. We expect to file this registration statement as soon as practicable after our initial public offering. However, none of the shares registered on Form S-8 will be eligible for resale until the expiration of the lock-up agreements to which they are subject.
MATERIAL U.S. FEDERAL TAX CONSIDERATIONS