July 17, 2013 by Tamara Piety
I have been on a bit of a blogging hiatus because of other commitments and will likely not post much between now and the end of August. But I got something today that stopped me in my tracks and which needs to be passed on. It is this gem from The Conglomerate suggesting that because of the many more restrictions on raising capital via an IPO (initial public offering) in the stock market for publicly traded companies versus a private placement (see my last post “You Have Been Warned”), that the new rule lifting the restrictions on general advertising might mean “the death of the IPO.” Professor Christine Hurt of the University of Illinois observes:
In a registered offering, issuers and underwriters can’t speak of the offering during the “quiet period” leading up to registration. Then, after registration, written communications must be through a statutory prospectus, or a “free writing prospectus” that meets certain requirements. Oral communications are allowed, but face-to-face and telephone conversations have practical limitations. The registration statement, with mandatory financials and disclosures, must be approved by the SEC, and prospectus delivery requirements continue once selling begins.
None of this applies to private placements! So, if Company A wants to raise $50 million in an IPO, it will cost more in legal and accounting fees, and Company A can’t talk to the public about the offering until registration, then only with a detailed prospectus, and must wait for the SEC to declare the registration statement effective. Meanwhile, Company B can set up a website touting the offering, with no limitations on what it says or must say. Company B can purchase billboards, taxi signs, sandwich boards, Facebook ads, or even send an email to every person on earth. The catch is that it can accept offers to buy only from accredited investors.
However, we know that it is entirely possible that unscrupulous offerors will not pay much attention to the “accredited investors” limitation. And relying on catching them after the fact seems to be a bad idea.
According to Professor Hurt,
The only advantages of the IPO that I can see is first, that the secondary market starts immediately, as compared with the six-month or year waiting period with Rule 144 or the limited but immediate secondary market to qualified institutional buyers through Rule 144A. Second, the Facebook conundrum of mandatory registration under Section 12(g) if an issuer has over 2000 shareholders or 500 unaccredited investors. But I’m not sure that’s enough to keep the struggling IPO market a strong alternative.
I am inclined to think she is right. Who thought this was a good idea? Could it be that 2008 was just a warm-up for the tsunami of fraud that general advertising of investments like this may unleash? I hope not. But I sure wish I had seen a better explanation of why we should not worry that this might unleash the investment equivalent of fat-burning pills.
I guess we will just have to wait and see….but I would fasten your seat belts.