On Monday, the office of the commonwealth of Massachusetts fined Morgan Stanley $5 million dollars for its role in allegedly artificially driving up the share prices before the Facebook IPO last May. While there has been talk of taking legal action against the parties involved in the famously failed IPO, this is the first concrete legal action taken against any parties involved in the Facebook IPO.

Massachusetts’ secretary of the commonwealth, William F. Galvin is accusing Morgan Stanley of coaching Facebook on ways to share information with stock analysts covering Facebook’s IPO pre-launch, which is a potential violation of a landmark legal settlement with Wall Street. While the specific Morgan Stanley banker dealing with Facebook is said to have never contacted these analysts directly, his actions, according to Galvin, put the average retail investors at a disadvantage because they lacked access to the same information.

“The broader message here is we are going to use any means possible to enforce the strict code in place about giving out information,” Mr. Galvin said in an interview. “We want to get the message across that if Wall Street wants to get confidence back, they can’t disadvantage Main Street.”

Since its IPO in May, the share price of Facebook has dropped from $38 to around $26 (as of the time of this posting), and investors who got in early on the Facebook IPO have seen their asset value decline by 31.5% so far. Because the price declined so much, the SEC is investigating whether there was any information knowingly omitted during the initial Facebook IPO process. This recent fine against Morgan Stanley could indicate the first shot over the bow.

Since May Facebook IPO

Since the IPO in May, Facebook has made a huge effort to begin proving the initially high valuation of their company by making a large showing at their efforts to improve company revenue, as shown in their Q3 earnings report and recent changes to the Facebook platform.

According to Zuckerberg’s announcement, most of Facebook’s revenue in the third quarter has come from ad revenue, and that’s where Facebook is trying to continue to show improvements. In October, the social network announced that it would begin charging marketers for posting consumer offers, which are coupon-like ads.

Previously, businesses hadn’t been charged for posting offers to users who had clicked “Like” on the businesses’ Facebook pages. The change in this policy has placed pressure on small to medium companies but did help increase Facebook’s revenue.

Moreover, Facebook is trying to broaden its mobile advertisement business. In the past 6 months, there have been several changes announced regarding mobile ads and Facebook’s mobile ad delivery network. For example, mobile ads will now be in ‘Sponsored Stories’ on people’s News Feeds. According to its Q3 financial statements recently, mobile advertisement contributes to 14% of revenues from advertisements accumulating to $150 million, almost 333% increase compared with last quarter. The mobile boost helped revenue rise 32% in the quarter that ended on Sept. 30, to $1.26 billion, slightly topping Wall Street’s expectations. This beyond-expectations figure eased worries from investors that Facebook’s mobile business might not be able to gain traction.

Secondly, Facebook is considering the option to sell premium services to businesses so that large companies can manage their customer relationships better. Also Facebook is testing a new wish list feature called ‘Collections’ as well as a ‘want’ button. This would help retailers determine what products they should buy in the next season. In total, seven retailers are partnering with Facebook for the test including Victoria’s Secret, Neiman Marcus and Michael Kors.

Last but not the least, Facebook acquired some technology from other companies to improve its platform. One example is an acquisition deal with Face.com to bolster its facial recognition technology. This is important to Facebook because people will probably visit Facebook immediately when they get notified that they’ve been tagged in a photo, and since Facebook is in the job of getting users to keep using Facebook, this could be considered a good play.

From the above examples, I could conclude that Facebook is trying to improve its revenue, and the effort seems to be paying off. However, it does not mean share price will necessarily go up or back to IPO price again. There are still several difficulties that Facebook needs to surmount in order to prove itself to long-term investors.

Facebook’s Challenges Ahead

Potential legal troubles aside, the first problem of revenue is where to find more clients. The website has more than 1 billion users, so where to find another 1 billion is the first challenge the company faces. Zuckerberg says he will focus on emerging markets in India and China. In my opinion, it is reasonable to suggest India and China will be the new field to explore since they have large populations, but there is more to the equation than meets the eye. In China, we have already had our Chinese Facebook called ‘Renren.’ It’s similar to Facebook and has attracted many users, mainly those in their 20s. Before I came to the U.S., I only used Renren.

Another challenge that Facebook will meet in China is that some foreign websites including Facebook are blocked by the Chinese government.

As for India, only 8% of the total population have access to internet and only 9% of them have smart phones.

The second challenge comes from Facebook’s competitors. Google is still the mobile advertising giant to beat, taking up 55% of the market, while Facebook only takes up 2.8%. Similar social networks like Twitter are regarded by some to be better positioned for their potential in the mobile advertisement arena.

Some analysts say when all these revenue measures have been put into effect, the only reason that Facebook’s share price will rise will be better-than-expected revenue reports. I partially agree with this opinion. And whether the recent legal action taken against Morgan Stanley will affect Facebook’s share price in the short-term remains to be seen. From my point of view, Facebook needs some new features and ideas to attract more users and some interesting games and activities to keep users.

All in all, Facebook is trying to prove to their investors that their revenue strategies are effective, but many challenges lie ahead when it comes to growing its market share, including possible investigations into the way that the Facebook IPO was handled. The $5 million fine against Morgan Stanley could be the end of the investigations, or just the beginning.