CAPITAL FORMATION, GOLDMAN, FACEBOOK AND REGULATION
Earlier this year Goldman Sachs and Facebook made headlines when the investment bank fproposed purchasing a stake in the private company and then sell interests to investors. More headlines followed when the bank later limited the offering to non-U.S. investors.
Presently there are two inquiries about private placement shares. One is by the SEC. Reportedly the Commission has been conducting an investigation regarding the sale and trading of private placement shares of companies such as Facebook. The SEC may be reassessing it’s the rules and restrictions on such offerings.
A second of more recent vintage comes from Representative Darrel Issa, Chairman of the House Committee on Oversight and Government Reform. While it could be that Representative Issa simply writes to SEC Chairman Shapiro about all things Goldman – recall that letters from Mr. Issa initiated the SEC IG investigations surrounding the enforcement action against the bank – this one appears to focus on the rules governing private placement shares.
The March 22, 2011 letter to Ms. Schapiro is really part argument, part document request and part typical congressional questions which telegraph the answer or perhaps are the answer. The central topics are private capital formation and over regulation. It begins by with three key points: First, while the U.S. markets for many years were the largest and most liquid now they are in decline. The number of IPOs had dropped since the 1990s. Second, the number of shares traded on U.S. exchanges peaked in 1997. Third, fast growing companies now try to delay an IPO as long as possible according to unspecified “anecdotal evidence” the letter claims.
Following the preamble the Chairman continues noting “to understand the SEC’s actions relating to unregistered equity issuances, I request that the SEC produce the following documents . . “ The request is for all studies by the Office of Economic Analysis “referring or relating to registered and unregistered equity capital formation.” (It is interesting that the congressman seeks these documents in view of his comments in the section which is second from the end of the letter.)
The thirteen page letter continues with a series of information requests organized by topic:
Decline of the IPO Market: After citing news articles regarding certain IPO delays and reiterating the points from the preamble of the letter, Representative Issa asks if the Commission has evaluated the reasons for the decline in the number of IPOs. The letter continues by ask if the decline in public equity offerings is because of: SEC regulations; FASB rules; an expansion of liability under the 2002 Sarbanes-Oxley Act; uncertainty created by 2010 Dodd-Frank Market Reform and Consumer Protection law; the risk of class action lawsuits; or the expansion of regulatory burdens.
The quite period: After reiterating events regarding Goldman and Facebook, the letter asks for the SEC’s understanding of these events. It also asks if the SEC understands that the quite period rules conflict with the promotion of disclosure, transparency and the First Amendment. Finally, the Chairman requests an explanation for all potential harm “that may realistically result to an unaccredited investor by the receipt of an advertisement by an issuer of unregistered securities that is targeted at accredited investors or Qualified Institutional Buyers.”
The 499-Shareholder Cap: After stating that the cap is a “fundamental roadblock to private equity capital formation” the letter continues with a series of points focused on the reasons the SEC has not altered the rule which it is outdated. The section ends by inquiring about the reasons “the SEC prevent[s] QIBs from trading privately placed equities of U.S. issuers ?”
Early state capital formation: This section begins by stating that early equity capital formation is essential to young, innovative companies that are “rich with ideas but short on cash.” It then raises a series of points focused on the burdens on capital formation for small companies from SEC regulations and requests for an explanation. The section concludes by raising a final question on this topic: “[D]id the SEC, or any of its officers or employees, intend to influence Facebook or Twitter to issue IPOs sooner than they otherwise would?”
Organizational barriers: If the limitations on the number of shareholders that could invest in private placements and the quite period were eliminated many companies would likely shift to private rather than public equity the Chairman declares. The letter continues by asks if this is a conflict for the SEC since if permitted the jurisdiction of the agency would be reduced. The section ends by questioning the qualifications of agencies to evaluate the economic impact of regulations.
Exemptions for Unaccredited but sophisticated investors: The final section claims that many small companies may not have access to the equity markets and asks if the SEC has considered making an exception for websites like the UK’s crowdcube.com? Representative Issa then asks if “the SEC agree[s] that the United Kingdom and other jurisdictions may gain a competitive advantage over the U.S. and improve their economic growth through advancements in their regulatory structure that enable crowdfunding and similar investment vehicles?”