The following is an excerpt from Alistair Barr and Olivia Oran | June 5, 2012 | Reuters.com |
(Reuters) – In the aftermath of the Facebook IPO, investor outrage – and lawsuits – have focused on “whisper” estimates of future results that underwriters shared only with some clients.
The selective disclosures appeared to expose a regulatory loophole, and some bankers and securities lawyers now say relief could come from a surprising quarter.
The Jumpstart Our Business Startups Act, which President Barack Obama signed into law in early April, has been criticized for watering down regulations governing capital raising and increasing the potential for fraudulent stock sales. But the law also eases restrictions on what companies and analysts can say and do in the run-up to an initial public offering, which in turn could mean broader disclosure of some kinds of information.
In the case of Facebook, research analysts working for the underwriters reduced their forecasts just days before the IPO, and then shared the new estimates orally – whispered via conference calls – with some institutional investors.
Facebook’s shares dropped to an all-time low of $25.75 on Tuesday, more than 30 percent below their offering price. The No. 1 social network has shed about $32 billion of its value since its haphazard May 18 IPO.
That steady decline has investors seeing red, particularly retail investors who have complained that they did not have access to vital information that was available to big professional investors.
Lead underwriter Morgan Stanley has insisted that limited disclosure of forecasts, far from breaking any rules, was standard procedure for an IPO and in compliance with all applicable regulations. Rules designed to protect investors prohibit underwriters from publishing research on pre-public companies, while allowing verbal communication of such information.
That interpretation of the law and its ability to change research practices remains to be seen. The JOBS Act allows companies to communicate orally and in writing with investors before they file for an IPO. It also allows analysts employed by the underwriting banks to communicate more broadly with investors through written research reports before IPOs.
The new law applies only to companies that have less than $1 billion of annual revenue. That means Facebook, with 2011 revenue of $3.71 billion, would not have qualified. But the vast majority of start-up company IPOs fall into the sub-$1 billion category.
“If the JOBS Act lives up to its advance billing, there will be no need to whisper,” said Jim Tanenbaum, a partner at law firm Morrison & Foerster.
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