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Last week, Rep. Darrell Issa, Chairman of the House Committee on Oversight and Government Reform, delivered a letter to SEC Chairman Mary Schapiro. The focus of the letter: requesting information about initial public offerings (IPOs).
Issa's big thoughts: following the Facebook IPO debacle, we should look at IPOs under the nearly 80 year old Securities Act of 1933 differently. In particular: he is concerned that underwriters have so much discretion in pricing without much consideration of the market, and that they can give institutional clients more information than the public at large.
On pricing, the concern is that underwriters typically price the IPO at a discount to value so that their initial investors can gain what is commonly around a 15% return. Three-quarters of this money goes to institutions. He thinks the SEC should look at requiring IPOs to be done as "dutch auctions" essentially priced by the public instead of underwriters. This is how Google's IPO was done.
And the fact that underwriters told institutional clients that their projections were going lower, but not telling the public they were selling to, while apparently legal, also should be looked at says Issa. In fact, two of the underwriters even helped clients short the stock at the opening! Issa reports that 25% of all Facebook trading on its first day were short sales. That's really something.
In addition, the two "safe harbors" for forward looking information in the Securities Act, Issa points out, do not apply to IPOs, causing underwriters to have fear in disclosing their projections to the public at large. And one of them requires a reasonable basis for the information and preparation in good faith. Issa suggests looking at getting rid of that.
Interesting stuff. Maybe I'll comment on it!
For additional insights on reverse mergers, SPACs, other alternatives to traditional initial public offerings, the small and microcap markets and the economy, visit the Reverse Merger and SPAC Blog by David N. Feldman, Esq., Partner of Richardson & Patel LLP.
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