It’s been over a month since Facebook’s troubled initial public offering, and the fallout continues to reverberate from Wall Street to Capitol Hill. Angry shareholders have filed over 40 lawsuits against Facebook, its underwriters, and the Nasdaq stock exchange — lawsuits that could be consolidated in the Southern District of New York, setting up a blockbuster trial. The Securities and Exchange Commission is probing the role of Nasdaq, which suffered a technical breakdown that delayed trading for 30 minutes. Now, U.S. lawmakers — who’ve never seen an election-year issue they couldn’t try to capitalize on — are looking at whether reforms to the IPO process are needed. The fundamental issue is how to ensure that investors have confidence in the capital markets. At a time when the U.S. economy remains very shaky, the last thing Wall Street, regulators and policy-makers want is for investors to shy away from the stock market because they don’t trust the process.
On Tuesday, a House Oversight and Government Reform committee is scheduled to examine the recently-passed JOBS Act, which is supposed to help startups raise money, but the Facebook IPO is sure to be a major topic of discussion. Although Facebook’s stock price has rebounded somewhat since the disastrous launch, it remains 13.5% below the offering price. On Sunday, Nasdaq CEO Robert Greifeld told a conference of corporate directors at Stanford University’s Law School — in Facebook’s back-yard — that “arrogance” and “overconfidence” among Nasdaq staffers were partly to blame for the technical breakdowns that plagued the offering, according to an account of his speech in The Wall Street Journal. Greifeld said that although Nasdaq tested its systems ahead of the Facebook IPO, it wasn’t prepared for the massive volume of orders that came pouring in. Nasdaq’s breakdown may have spooked investors, causing many to sell, driving the stock price down, as Facebook suggested in a legal motion to have the lawsuits consolidated in the Southern District of New York.
But setting Nasdaq’s technical issues aside, Facebook’s IPO has shined a light on a broader, more fundamental issue about the fairness of initial public offerings. Facebook’s debut was supposed to be a proud moment for the company, its bankers and Wall Street. Instead, the episode has turned into a debacle that has reinforced some of the worst stereotypes about Wall Street: that bankers engineer IPOs to maximize profits at the public’s expense; that the stock markets can’t even handle their own systems; and the IPO process itself has become little more than a casino in which deep-pocketed investors and well-connected insiders have an advantage over everyday investors. It’s crucial for U.S. corporations — not to mention Wall Street and the U.S. economy itself — that the investing public has trust in the capital markets. That trust was shaken by the Facebook IPO debacle.
One issue concerns the information that companies are required to disclose to investors ahead of public offerings. One cluster of Facebook lawsuits alleges that company executives gave its underwriters more detail about the financial impact of challenges to its mobile advertising business than it did to the investing public. The underwriters, in turn, lowered their financial forecasts, which they then “selectively disclosed” to big, favored clients, but not the public, according to the lawsuits. At a Senate Banking Committee hearing on Capitol Hill last week, witnesses urged regulators and policy-makers to reform the IPO process to make it more of a level playing field. “It is very important that we try to give everyone the same information,” Ann Sherman, associate professor of finance at DePaul University, told lawmakers, according to Marketwatch.“I think the question-and-answer part of the road show should be available even to retail investors.”
The IPO road-show is an opportunity for company executives to convince Wall Street investors to buy stock in the offering. But those meetings are typically limited to well-heeled clients of big investment banks, not everyday investors. Lise Buyer, a Silicon Valley-based IPO expert who helped guide Google’s offering in 2004, offered an innovative suggestion to the panel: an online question-and-answer session during which company executives could share information with a larger group of potential investors than is possible during traditional road shows. “During this part of the road show, management teams would offer answers to individual investors’ questions, which are submitted online,” Buyer said, in comments cited by Marketwatch.
At the House hearing scheduled for Tuesday, one witness will be respected corporate governance expert John Coffee, a professor at Columbia Law School. Coffee told Marketwatch that he intends to push for more transparency in the IPO process, and he urged regulators to “require that the real road show is available to the public.” Committee Chairman Rep. Darrell Issa, a California Republican, recently wrote a letter to SEC Chairman Mary Schapiro, in which he called for a review of the IPO process. “The Facebook IPO taught us that, at a minimum, the IPO process suffers substantial flaws,” Issa wrote in the June 19 letter. “In fact, it appears the entire IPO regulatory framework, based on an outdated Securities Act of 1933, fails to provide a market-based solution to IPO pricing.”