See below a summary of Rep. Darrell Issa's letter to SEC Chairman Mary Schapiro about problems with IPOs such as Facebook's.
Issa believes dutch auction IPOs, such as Google's, are much fairer and eliminate the discount underwriters place on traditional IPOs so that there is a "pop" in the stock for their first investors. In a dutch auction, potential investors can go online and say how many shares they'd be willing to buy and at what price. The "auctioneer" starts at the highest price offered and continues down from there until all shares are accounted for. Then all bidders get to buy at the lowest price bid.
I like the dutch auction and maybe the SEC and/or FINRA can do more to encourage or incentivize it. It has populist appeal and helps bring in the brave new world of Internet offerings. It also means initial investors aren't coming in just to quickly get out. And of course it means typically a better offering price for the company, which means less dilution to the entrepreneur.
But I would not recommend cutting off the traditional approach either if that is what the parties wish. The IPO pop is as familiar as the sound of the champagne cork on New Year's Eve to many, and it's not the end of the world if some people still want to use it. Some feel an important gauge of an IPO's success is how it trades on its first day. But I agree with Issa's view that dutch auctions should become more popular. IMHO.
Next: thoughts about Issa's comments on forward looking information.
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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