While Facebook’s (NASDAQ:FB) stock has had a nice rally, the stock is still down 16% from the IPO price. And yes, Congress is investigating the matter by holding hearings. The concern is that the current process of taking a company public may not have enough protections for retail investors.
Actually, I think it’s a good use of our legislators’ time. IPOs are critical to the U.S. economy and have provided much-needed capital for breakout companies like Starbucks (NYSE:SBUX), Wal-Mart (NYSE:WMT) and Amazon (NASDAQ:AMZN).
But the past decade has seen a big falloff in IPO activity. During the 1990s, it was typical to have 400 to 500 offerings annually Now, it’s normal to see just 100 to 150.
Why the drop? A big reason is the onerous regulatory structure.
But the good news is that Congress has already passed legislation to lessen the burden — with the JOBS act. It was one of the few laws in recent years that received tremendous bipartisan support.
Yet Congress wants to change things even further. It may even look at amending the Securities Act of 1933.
To this end, Congress is considering the idea of requiring companies to use a “Dutch auction” to issue securities. This involves a complex bidding system that sets the price of an IPO.
On its face, it seems like a reasonable proposal. Who doesn’t want to make the process more fair? Besides, Google (NASDAQ:GOOG) used the Dutch auction for its own IPO, which turned out to be a great investment opportunity.
But meddling in the pricing of an IPO is extreme. When a company is raising money, it wants to have control over the process. Perhaps one of the biggest factors is selecting the right investors. Does a company want to issue shares to a fast-trading hedge fund or a long-term holder? Ultimately, this should really be a decision for the company — not Congress.
Still, there’s definitely room for changing the Securities Act. Perhaps the best idea would be to get rid of the “quiet period,” during which a company is prohibited from making comments about its IPO. The quiet period is meant to protect investors. But it often does the reverse.
As we’ve seen with high-profile IPOs — like Groupon (NASDAQ:GRPN) and Zynga (NASDAQ:ZNGA) — rumors are easily spread, but a company can’t correct them. In the end, this could harm investors who are making investment decision on erroneous information.
Again, Congress is smart to rethink the IPO rules. But unfortunately, it might be focusing on the wrong parts.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO. Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.
A long-time follower of the IPO scene, back in 1999 Tom started one of the first sites in the space called WebIPO. It was a place where investors got research as well as access to deals for the dot-com boom. Tom also wrote the top-selling book, Investing in IPOs. In it, he covers all the aspects of analyzing an IPO, such as reading the prospectus, detecting the risk factors and understanding some of the arcane regulations. But don’t worry — if that process is too intimidating for you, thankfully Tom will do the legwork for you right here in the IPO Playbook blog.
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