Congress nears knee-jerk on IPO rules.
FORTUNE — Rep. Darrell Issa (R-CA) yesterday sent a letter to SEC chair Mary Shapiro, asking for answers to questions about how to improve the IPO process. Basically, he seems to have decided that Facebook FB exposed a systemic IPO fault-line.
I didn’t know whether to laugh or cry. Laugh because it’s so dumb. Cry because this is what House leaders spend their time on.
So, instead, I just made a list of complaints:
1. Issa writes repeatedly about a “non-market based approach” to pricing IPO shares:
Really? Does Issa think that banks forced Facebook buyers to pay $38 per share? Maybe by threatening to remove their poking privileges? Is he aware that plenty of companies price below their IPO offering ranges, or offer fewer shares, because the “demand” is too weak? If you want to argue that Facebook didn’t deserve to be valued at $38 per share, fine. But don’t tell me that demand was only a tangential consideration when Facebook managed to sell over 421 million shares.
2. As an aside, can we stop pitying the poor Facebook IPO buyer. The stock was off around 20% as of this writing. Not exactly the sort of fiscal catastrophe that fills up the pawn shop shelves. Sure, short-time traders got burned. Is Rep. Issa worried about quarterly hedge fund returns? Long-time holders — the types of folks we collectively reward with capital gains tax treatment — still may be made whole (or better).
3. Issa apparently is a big fan of the “Dutch auction” approach, repeatedly citing Google GOOG . Apparently he feels that was the last appropriate initial public offering. Yes, back in 2004. For context, 430 VC-backed companies have gone public since Google began trading. And that doesn’t even count another 298 private equity-backed companies and countless others, like General Motors GM .
I’m not knocking Dutch auctions, but is he really suggesting that almost all of those subsequent IPOs — which raised hundreds of billions of dollars — used a fundamentally flawed process? One would think that a free market-loving GOP congressman would realize that there is no “real” price for a company. Just what someone is willing to pay for it. And, in most cases, someone is going to end up thinking they paid too much or sold for too little. Maybe IPO prospectuses should just be reconfigured so that the “risk factors” section is on page one.
5. Issa suggests that the fabled IPO discount — under-pricing by 10%-15% in order to create a pop — is effectively an unfair tax on issuers. To a certain degree, there is validity to his point. And I actually lauded Facebook and its bankers for getting $38 per share, since the primary purpose of an IPO is to raise capital.
But some companies actually desire the pop, since it helps generate headlines, create market momentum, engender shareholder goodwill, etc. Those are market-based decisions, no? Plus, companies sell just a portion of their stock at IPO — meaning that they can eventually capitalize on share price increases. In other words, issuers have choices to make. If any issuers feel that their underwriters committed malpractice by intentionally under-pricing shares without the company’s consent — particularly for the benefit of bank clients – then those issuers should sue. To my knowledge, it hasn’t happened.
5. The one silver lining is that Issa does point out how the quiet period can put retail investors at a disadvantage to large institutions. It’s a similar point to the one I argued last year, in advocating for the SEC to abolish the “quiet period.” Got to wonder if my proposal may actually get a decent hearing at the SEC in light of Issa’s letter, or if it actually will be physical roadshows that get the boot. Most likely, the SEC will wait for Facebook furor to quiet down, and then do nothing. After all, it still has all those JOBS Act rules to write…
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