Friday, April 27, 2012

Can a Controversy Exist If Only a Referee Participates?

Truly a head scratcher

One would think a controversy would require some new disagreement between people besides the referee. Evidently not. Seems the JOBS Act has created a controversy without new contesting opinions. Let’s start with a little background. The WALL STREET JOURNAL reported on April 12, 2012 (“JOBS Act Jolts Firms to Action”) that “Two companies have submitted confidential plans for initial public offerings under the JOBS Act that was signed into law last week, an indication that some firms and their backers are moving quickly to capitalize on the controversial measure.”

What’s the controversy? As always, there are those who might buy and those who might sell. Is that the controversy? One has to hope not. That is a market. There are people who participate in new offerings and people who don’t. Is that the controversy? Hardly. That’s true of any market unless the government enacts a mandate that everyone participate. Beside, as we saw when the government tried to open up IPOs during the tech bubble and then restrict IPOs when their actions backfired, it is dangerous to try to manage market participation.

One of the absurdities of those who want to report a controversy is what they use to justify the notion. One provision of the JOBS Act is that certain companies can file draft registration statements for their IPOs on a confidential basis for review by the SEC staff. Before it had to be made public in an initial filing, usually made several months before an IPO is actually priced and completed. The JOBS Act allows qualifying companies to postpone public disclosure of such information until 21 days before they launch a series of "roadshow" meetings to sell the IPO to investors. Because such meetings usually take about 10 days, the result is that investors may only have a month to scrutinize disclosures instead of three months or longer. That time difference is the great controversy.

To support the contention that the two month difference is controversial they use the example of online coupon company Groupon Inc. Groupon revised the first quarterly financial results it reported as a public company. It discovered that executives failed to set aside enough money for customer refunds. The changes reduced fourth-quarter revenue and widened its loss.

Alas, you respond, “Don’t companies that have been public for decades have to revise financial results?” Yep! “Didn’t Groupon go public under the rules that existed before the JOBS Act.” Yep! You got me again. Fact is Groupon is totally irrelevant.

Will some people lose money investing in the IPOs made possible by the JOBS Act? For sure. Hopefully, that’s not controversial. It’s true of all investments. No matter how good an investment is, someone will figure out a way to lose money on it. Investing is risky. IPOs are particularly risky, and most investors should avoid them. No regulation can change that. They can have a roll in a diversified portfolio, but as has been argued in previous postings, angel investing is probably a better portfolio fit for many investors.

The JOBS Act shouldn’t be subjected to contrived controversy based on the referees’ aspirations for power. Startups are too important to be made the political football of power hungry regulators or their mouthpieces.

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