by Beth Connolly on May 29, 2012
Facebook IPO fallout has been heard in every corner. Small investors are now wary of jumping into the stock market. Big newspapers are worried about whether their business models will fall into Facebook’s failure-to-monetize trap. At least one IPO has been delayed due to concerns about weak market performance. Lawsuits have been filed against Nasdaq and class-action suits against Morgan Stanley. The SEC and FINRA have promised to scrutinize the decisions that led to the disastrous IPO.
But for regulatory professionals, the most interesting element of the case is the debate that the IPO foul-up triggered. In the same way that the $2bn JPMorgan loss kickstarted the practically tabled discussion of the pressing need for stricter regulation of too big to fail banks, the Facebook IPO brought a dormant debate to the surface: is the stock market unfair to small investors?
Francesco Guerrera at the Wall Street Journal calls the Facebook IPO “a case study of the power wielded by insiders over outsiders.” It is patently ironic that Facebook, a company that built its value on making private information public, should outrage the world because analysts kept some crucial public information private. It is equally ironic that Facebook, a company that brought together users from all over the planet, realizing its massive popularity only when it did away with tedious exclusivity ratings (the site was first limited to Harvard, then Ivy League colleges, then private 4-year-colleges, then all colleges, then high schools, then workplaces, then…anyone and everyone), should have sought to privilege some investors over others. On the other hand, perhaps a company that easily capitalizes on hordes of individual users should have no problem screwing them over.
In such a conflict-prone [regulatory] environment, it seems more sensible to adopt a zero-tolerance approach, banning analysts from any communication, written or verbal, with investors during an IPO.
“To say yes to verbal and no to print and email is incongruous,” says Jacob Frenkel, a former enforcement lawyer at the Securities and Exchange Commission who is a partner at the law firm Shulman Rogers. “You have to inject consistency in the process.”
When investors’ faith in the market’s integrity is at stake, silence may well be golden.
What do you think? Should all communication between analysts and investors be banned? What actions should regulators take to ensure that the next big IPO doesn’t make the same mistakes that Facebook did?
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