The offering has been an embarrassment for Morgan Stanley. Shares fell again Tuesday.
Just days before Facebook Inc. went public, some big investors grew nervous about the company's prospects.
After publicly warning about challenges in mobile advertising, Facebook executives held conference calls to update their banks' analysts on the business. Analysts at Morgan Stanley and other firms soon started advising clients to dial back their expectations. One prospective buyer was told that second-quarter revenue could be 5 percent lower than the bank's earlier estimates.
As investors tried to digest the developments, Morgan Stanley was busy setting the price and the size of the initial stock offering. While some big institutions scaled back on their plans, others placed large orders. And retail investors clamored for shares.
In the end, Facebook and the Morgan Stanley bankers decided they had enough demand and interest for Facebook to justify an offering price of $38 a share.
When Facebook went public on May 18, its shares barely budged -- and they have been falling ever since. On Tuesday, the stock closed at $31, more than 18 percent below its offering price.
The IPO of Facebook was supposed to be Morgan Stanley's crowning achievement, but it is turning out to be a big embarrassment.
Over the last year, the bank helped usher in a new generation of technology companies, leading the offerings of LinkedIn, Groupon, Pandora and more than a dozen other startups. Facebook was poised to be the biggest and most ambitious. When the dust settles, Morgan Stanley could make more than $100 million in fees on the IPO.
But rival bankers and big investors have complained that Morgan Stanley botched the debut. They contend that the bank set the price too high and sold too many shares to the public.
Facebook's management team is also shouldering some blame. David Ebersman, the company's chief financial officer, had spent more than a year orchestrating the stock offering, drafting the prospectus and meeting with investors long before the company picked its bankers.
Facebook's fate as a public company is hardly sealed. Many newly public companies stumble out of the gate and later become top performers with appealing stocks, a group that includes Amazon.com.
But Facebook's troubled debut raises questions about the IPO process. Regulators are concerned, in part, that banks may have shared information with only certain clients, rather than broadly with investors. On Tuesday, William Galvin, the secretary of state in Massachusetts, subpoenaed Morgan Stanley over discussions with investors about Facebook's offering. The Financial Industry Regulatory Authority, Wall Street's self-regulator, is also looking into the matter.
The steps a company takes to go public are highly choreographed and regulated by securities law. A company cannot comment or disclose new information about its business or prospects unless it does so publicly by amending its prospectus. Otherwise, it risks running afoul of regulators. The company could also be vulnerable to securities lawsuits, as investors would have to prove only that it made "material misstatements" ahead of an offering, rather than a high threshold of securities fraud.
"Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs," a bank spokesman said in a statement. "These procedures are in compliance with all applicable regulations."
"I think it's way too soon to judge Facebook as a stock or company," said Chris Dixon, a partner of Founder Collective, a venture capital firm. "I think if in, say, a year Facebook isn't growing that would cast doubt on social media businesses more generally."