Snapchat has revealed that the company is under investigation for its initial public offering (IPO). The social media app’s stock has dropped after the news about the inquiry.
Why Snapchat is under investigation
The US Department of Justice (DOJ) and the US Securities Exchange Commission (SEC) is investigating Snap, Inc. for information about its IPO launch in 2017. The inquiry stems from investors alleging in a lawsuit that the business never disclosed how much Facebook's Instagram affected Snapchat’s daily user numbers in 2016. They claim that the social media company misled them about how competition from Instagram caused a drop in the app’s growth. Shareholders also assert that Snap hid a lawsuit from a whistleblower that said the corporation was falsifying numbers about daily active users of the site.
The corporation revealed to shareholders that it is responding to subpoenas from the US agencies.
‘While we do not have complete visibility into these investigations, our understanding is that the DOJ is likely focused on IPO disclosures relating to competition from Instagram,’ said Snapchat in a statement.
Snapchat asserted that it committed no wrongdoing.
‘We continue to believe the class action’s claims are meritless and our IPO disclosures were accurate and complete,’ noted the company.
Snapchat’s IPO problems
Even before the investigation, Snapchat was experiencing troubles with its stock. The company was once one of the most valuable IPO’s, with a devoted following of millennial users. Now the social media app’s stock sells for under $10. The current investigation is hurting the corporation’s bottom line, but it’s not the only reason for a decline.
Michael Pachter, analyst with Wedbush Securities, noted that other factors brought down Snapchat.
‘The share price is not down because investors perceive a risk investigators are going to find something. It’s down because subscriber growth declined, and revenue isn’t growing fast enough,’ said Pachter.
It remains to be seen how the investigation and lawsuits will impact Snapchat’s stock in the future.