Snap

Snapchat Is Doing So Badly, the Feds Are Getting Involved

Investigators want to know if Evan Spiegel’s failure to warn investors about Instagram was ignorant or illegal.
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After turning down an offer from Mark Zuckerberg, who wanted to acquire Snapchat for $3 billion in 2013, Snapchat C.E.O. Evan Spiegel had to contend with the very real possibility that the Facebook C.E.O. would dedicate his company’s considerable resources to making Snapchat redundant. In short order, Zuckerberg began to do just that, mercilessly copying Snap’s features with remarkable success: in June, Instagram announced its Stories feature had attracted 400 million daily users, while Snap’s number of daily active users hovered around 191 million in the first quarter of 2018. Reports have suggested that those within Snapchat were well aware of Instagram’s potential to eat their lunch. But whether Snap disclosed the extent of these concerns to investors is now a matter of interest to the U.S. government.

On Tuesday, Reuters reported that both the Securities and Exchange Commission and the Department of Justice have subpoenaed Snap over allegations that it misled investors by not revealing Instagram’s potential to hurt Snapchat’s growth. “It is our understanding that these regulators are investigating issues related to the previously disclosed allegations asserted in the class action about our I.P.O. disclosures,” the company said in a statement. “While we do not have complete visibility into these investigations, our understanding is that the D.O.J. is likely focused on I.P.O. disclosures relating to competition from Instagram.” It’s unclear what triggered the S.E.C. and D.O.J. requests, but last week the government made a sealed filing in a shareholder lawsuit in federal court in Los Angeles, in which investors allege that before going public, Snap downplayed the risk of competition from Facebook.

The suit also alleges that Snap failed to disclose a sealed whistleblower lawsuit from before its I.P.O., in which a former employee claimed Snap had misrepresented its daily-active-user numbers. The company has denied both allegations, saying in a statement, “We continue to believe the class action’s claims are meritless and our I.P.O. disclosures were accurate and complete.” In April, a federal court ordered the whistleblower case to arbitration, and in June, a judge denied Snap’s motion to dismiss the lawsuit. The company says it will continue cooperating with both the Department of Justice and the S.E.C. Snap shares tumbled on the news: on Tuesday, they closed at $6.71, and on Wednesday they hovered around $6.60.

The twin D.O.J. and S.E.C. probes are the latest data points in what looks to be a downward spiral for Snap, which has seen its user growth slacken dramatically in the past year and a half, despite narrowing losses and recording higher-than-expected sales growth. The company is also facing something of an executive exodus—earlier this week, its V.P. of content, Nick Bell, parted ways with the company as part of a “planned reorganization” of its content team. Employees, too, are looking for an out: according to a recent survey, 40 percent of Snap’s 3,000-odd staffers indicated they’re planning to jump ship. Whether or not the government probes have merit remains to be seen—in August, several people “familiar with Snap’s operations” told Bloomberg that Spiegel had “refused to believe that [Instagram tories were] contributing to a slowdown in growth,” but the company has disputed this narrative, pointing to both its I.P.O. prospectus and the fact that Spiegel has discussed competition from Instagram in the past. Either way, another strike against Snap in the eyes of investors could not come at a worse time for the foundering company.

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