Tuesday, June 5, 2012

Is the Facebook IPO the new normal?

Earlier this year, congress passed and President Obama signed into law, the JOBS act.  I found the act chilling in terms of the externalities it adds to markets under the auspices of making it easier for tech firms to go public. Students enrolled in either my entrepreneurship or strategy seminars heard a number of lectures (near rants) on the problems with this bill.  I"m surprised I didn't blog about it, but I was in the midst of the posts about gas prices and things got sidetracked.  Now, with the Facebook IPO fiasco upon us, I find myself wondering if we are seeing the new harbinger for tech IPO's.

What the JOBS bill did, was:
1.  Reduce or eliminate audit requirements for tech firms seeking to IPO
2.  Remove penalties for executives who distort their financials in public presentations, provided that the prospectus contains more accurate information

The bill was wildly popular in congress, easily passing both houses during a congressional period renowned for partisanship.  However, int he business press, it was far from popular.

Now we are looking at the Facebook IPO and the JOBS act should be at the front of the discussion.  While there are problems with NASDAQ's handling of the IPO, the larger concerns lie in the allegations of information distortion.  It is alleged that Facebook pedaled two sets of financial information.  One overly optimistic set of numbers to small investors and another, more conservative (and accurate) set of numbers to large banks.  Those with superior information were able to take advantage of initial price movements to obtain profits not justified by the 'true' financial shape of the firm.

Congress is now investigating the distortion, but given the JOBS act, I wonder if the investigation is really just political theater.  Facebook's IPO is exactly what is expected under the JOBS act.  Indeed, investor information is likely to get worse under the JOBS act.  Indeed, it appears that the anti-disclosure requirements may be counterproductive to an active tech IPO market, with several upcoming IPO's delayed or halted.

For markets to operate efficiently, we require equal access to accurate information.  We can not have efficiency where one party has an advantage in information quality.  The cost of this transparency is disclosure, auditing and governance law.  Removing this transparent layer adds too many questions to the veracity of IPO information.  The smart money either will (a) get it's information early or (b) sit out.  In the long-run, this leads to an under-developed IPO market, which hurts (not helps) tech companies.

The sad thing is, this is a predictable outcome from JOBS.  And, it's likely to get worse, not better.

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