Facebook IPO: How justified is a $100 billion valuation for a mere $4 billion company?

Speculations have been made that Facebook's initial public offering, which is likely to hit capital market by the first quarter of 2012, could value the popular social networking site at worth of $100 billion.

The upcoming IPO from the world's most popular social network with more than 500 million users is one of the most highly anticipated public offerings on Wall Street. The offer became even more lucrative when Goldman Sachs and other private investors poured in $1.5 billion into Facebook back in January, taking the company's valuation to a whooping $50 billion earlier this year.

According to information on Sharespost, an exchange for trading shares in private companies, based on the recent transactions of Facebook shares on the secondary market, the company has been valued at a price range of $78 billion to $81 billion.

Meanwhile, market research firm eMarketer said Facebook is expected to generate roughly $4 billion in advertising revenue in 2011, up from $1.86 billion a year earlier.

Considering recent reports that over five percent of U.S. users abandoned Facebook in May, 2011 due to privacy issues and concerns that Facebook has become too much of a business, questions have been raised whether the company is growing fast enough to justify a valuation of $100 billion.

The 500 rule

Other than losing users, one of the key factors affecting the likely new issue is a section of the 1934 Securities and Exchange Act, known as the 500 rule that would kick off in April 2012.

The 500 rule mandates that once a private company such as Facebook has more than 500 investors, it must disclose its quarterly financial information to the Securities and Exchange Commission, just as public companies do.

Facebook has already indicated that it expects to cross the 500-investor threshold this year. Some say this is the reason that the social networking giant would probably want to launch a formal IPO in advance before the public-company reporting obligation gets activated.