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Fanning Flames or A Bunch of Hot Air? 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.

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 Snap 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?

Snapchat could raise as much as $4 billion in its upcoming IPO, 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.

This is a guest post written by Alexandra Isenegger for Haggerston Times. Alexandra is the founder of disruptive legal services provider Linkilaw

 

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