There’s a great story in the Journal this morning about how the JOBS Act, which allows small new public companies to do various lazy things in their financial reporting, actually isn’t having that effect, because the companies hold themselves to a higher standard. Here is a representative passage:
Thanks to the law, Vienna, Va.-based software company Eloqua Inc.met with a large mutual-fund company to gauge interest in its stock about a month before its August IPO. The JOBS Act allows smaller companies to engage in such discussions with select investors before the SEC gives companies its approval to market an offering.
The meeting helped executives hone their pitch to investors ahead of the company’s “roadshow” to market its shares, Eloqua Chief Executive Joseph Payne said. But the company won’t take advantage of another provision allowing it to put off hiring a public accounting firm to audit its internal controls, though Eloqua estimates the audit could cost up to $400,000 each year. “We might look like a little-boy company when we worked really hard to be a big-boy company,” he said.
ISN’T THAT ADORABLE? I want to give Eloqua a hug.
This story fills me with warm feelings about not just Eloqua but also America and our capital markets and our investors and our regulators and, just, everyone, group hug guys. One story you could tell about IPOs is that they are a thing that unscrupulous stock promoters do to trick dumb investors into giving them money to support their frauds, and that without strict SEC standards for accounting and offering-document review all of our grandmothers would be losing their money on ideas that sounded great but were actually not great. An alternative story is that the investors who drive the success and pricing of IPOs tend to be big intelligent institutions and are unlikely to be conned into parting with their money by a few lame magic tricks. Evidence is perhaps somewhat mixed – things about Facebook go here1 – but little – sorry! big! – Eloqua is good evidence for story #2. Read more »
The SEC had a feisty week last week, telling off Congress with cheery abandon. Darrell Issa sent them a pretty crazy letter a few months back demanding that all IPOs be Dutch auctions for some reason, and last week Mary Schapiro sent him a deeply researched 32-page letter telling him, with appropriate condescension, that that wasn’t happening. Also a few months back Congress passed a JOBS Act demanding that the SEC allow much more fraud in connection with sub-$1bn-company IPOs, in particular by occasionally allowing bankers and analysts to be in the same room with each other, and last Wednesday the SEC released a Q&A saying that that wasn’t happening either.*
There is much to ponder but let’s talk about the overall tone, which is:
- the SEC wants to make sure you don’t get bad information, but
- it’s not so concerned with you getting good information, or at least, not all the information you might want, or at least, not all the information that somebody richer and better-looking than you might get.
So there is a lot of protection against research analysts shading their analysis to win IPO business, and a lot of discussion in the letter to Issa about the danger to investors of getting incomplete information if they are given anything other than the 200-page chock-full-o-risk-factors prospectus for an IPO. But there is not much discussion of the fact that some people get more information – in particular, the fact that in the Facebook IPO the company seems to have told the banks’ analysts to revise their estimates downwards, and the analysts seem to have done so and then told their biggest customers (and nobody else), and then those big customers seem to have piled out of the deal leaving it to retail investors who didn’t know any better. Read more »
You are doing that aren’t you? Now you have no excuse if they’re not perfect:
Ms. Schapiro, in prepared testimony before a panel of the U.S. House oversight committee, said that the SEC would not meet a July 4 deadline set by Congress to complete the rules lifting the longstanding ban on publicizing private securities offerings.
She said the SEC’s work on this issue is more complicated than it would seem because Congress directed the SEC to require issuers of private offerings to take reasonable steps to verify that purchases are accredited investors.
So I’m excited to see your ads on Dealbreaker for which you will pay top dollar, but as I idly looked for the MAAX zips documentation today it occurred to me that there’s another interesting possibility in this rule change that could also redound to Dealbreaker’s benefit, which is that it might dramatically increase the amount of information out there on private offerings.
Right now companies in the U.S. – and for “companies” read “companies, hedge funds, structured credit vehicles, and other what-have-you” – offer their securities in one of two ways:
(1) publicly, and
(2) not. Read more »
My time in the financial industry entirely postdated the global research settlement, which means that I have a different view of sell-side research from some of the olds. As far as I can make out, there are people who think that investment bank research was once a demonic scheme in which research analysts – larger-than-life figures whose recommendations were irresistible to the retail investors who in this vision bought all of every pre-2003 stock offering – swindled those besotted retail investors into buying crap stocks at inflated prices so that the banks could get gigantic investment banking fees. Whereas I always thought that investment bank research was a sort of cute endeavor of unclear commercial purpose, taken skeptically by the institutional investors who buy most of every post-2003 offering, made fun of by bankers, and conducted by people whom we never saw because, among other things, our network was set up to prevent them from emailing us and vice versa.
Perhaps before the settlement giants roamed the halls of research divisions, defrauding investors with abandon, but once their email was cut off from the bankers’ email they retreated into mousy irrelevance? Unclear. In any case THEY’RE BACK BABY, sort of: Read more »
I take back whatever mildly negative things I may have said about the JOBS Act, since apparently in addition to making it easier for small startups to rip off investors, it will also make it easier for small hedge funds to rip off investors:
President Barack Obama’s securities-law rollback known as the Jobs Act, expected to be signed into law next month, also contains a provision that would lift the ban on the marketing of private funds, potentially giving hedge funds, private-equity funds and others greater freedom in marketing their offerings to the public, industry attorneys said.
Currently, private funds are allowed only to market to a small group of investors: those with whom they have pre-existing, “substantive” relationships. Under the bill, hedge funds could start sponsoring sporting events and begin advertising their funds in print, the lawyers said.
The shift is “significant” and could provide a boost to small hedge funds trying to raise capital but that lack brand-name recognition or wide contacts, says Steve Nadel, a hedge-fund lawyer with Seward & Kissel LLP in New York; larger, more established firms sometimes have investors waiting to invest.
The Journal goes on to talk about the free speech aspect of this, and I did that too, so yay, now you can tell strangers how awesome your hedge fund is, AND OF COURSE YOU WILL DO JUST THAT, and you probably are already and are surprised to learn that it’s illegal*? Also, and more importantly, soon you will be able to give people money to induce them to tell strangers on the internet how awesome your hedge fund is, so, y’know, consider giving us some of that money, because we like money. Read more »
There’s this thing called the JOBS Act that would basically make it easier for small or smallish companies to raise money by giving investors unaudited financials or not having internal controls or just lying to them on the Internet, which is my racket. I’ve enjoyed reading people really ripping into it*, like Simon Johnson, whose take seems to be canonical, or Yves Smith, whose take is good too but I prefer “Just Open Bucket Shops Act**” to her “Jumpstart Obama’s Bucket Shops Act” if we need a sarcastic acronym and, yeah, I suppose we do.
I mostly agree with the ripping, because, like I’ve said before, either the SEC registration process is necessary to protect investors, in which case it’s especially necessary for smaller newer companies, or it’s not, in which case it’s no more necessary for large companies than for small ones. So fine. But the JOBS Act crowdbuzzwording mania is definitely timely, what with Kickstarter being a thing and the Facebook IPO being the hugest thing in the history of things and also something where people apparently talked about offering shares of Facebook on Facebook because synergies. Anyway it seems likely to me that the widespread desire to loosen securities laws is not driven solely by the desire of businesses to raise capital – since, among other things, as Yves Smith says, crowdmuppeting is a super dumb way to raise capital, and actually come to think of it so are IPOs, kind of – but also by the desire of people who are not quite private equity magnates to get their hot little hands on some shares in their favorite social doodad.
As it stands now, not only can the non-rich not buy shares in Facebook unless they (a) are “accredited investors” ($1mm assets or $200k in income) and willing to get sort of ripped off or (b) just, like, wait a few weeks, but non-accredited investors are also not allowed to even hear about exciting investing opportunities from private companies looking to sell securities. Because it’s illegal to sell unregistered securities***, even if you only sell them to rich people, if you’ve made a “general solicitation” – that is, basically, if you’ve talked about them in pleasing ways to non-rich people. This is why Bridgewater doesn’t advertise on TV, and why no matter how much you want them you can’t get Whitney Tilson’s market insights unless you are an accredited investor on his mailing list, or a Dealbreaker reader, or a human. Read more »