Just after the brouhaha about money fund reforms, the SEC is now reviewing its quiet period disclosure restrictions before initial public offerings (IPOs).
The Facebook IPO is the instigation for the review because lawmakers claim that small investors did not have enough information before what has become known as the most botched stock offering in history.
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Changes in technology and even in the markets themselves require the review. The Jumpstart our Business Startups (JOBs) Act is also coming into play since one of the things that law was designed to do is to assist small companies’ ability to raise capital.
Facebook’s first day of trading was sullied by technical glitches and the glaring illustration that information is more readily available to large clients of certain banks and not to the average investor.
Current gag rules are designed to keep company executives from hyping a stock before it goes public. Rep. Darrell Issa received a letter from SEC head Mary Schapiro saying the quiet period rules should be reviewed.
Banks participating in the Facebook offering say they did nothing wrong and followed standard pre-IPO practices in communicating with clients. Changes were made to the rule in 2005, allowing emails to be sent about upcoming offerings if they were accompanied by a prospectus.
Schapiro has said a prospectus contains all the information investors need before an IPO. Banks have viewed parts of the rule as a tripwire for company executives. For example, Groupon’s CEO sent a very upbeat email about the offering before its IPO and came under scrutiny from the SEC. No disciplinary action was taken.
Changes in the way IPOs are priced is also being reviewed. Mr. Issa proposed that all IPOs set their prices by Dutch auction. Schapiro prefers banks to choose the criteria used to set prices and noted that there are legitimate reasons
some offerings pop on the opening day of trading.
She also noted that the role of underwriters in disclosing information to large institutions is fraught with conflicts of interest. She also said existing rules were sufficient to deal with these conflicts.