There, I said it. If you thought the Facebook IPO was an experience to forget, consider this warning: If you see a new stock offering coming from the U.S. JOBS Act, consider it carefully. If it were me, I’d run like the wind. Here is why.
We have previously commented on the great disservice done to investors and markets generally by this ill-conceived piece of election year pandering. Now we’re bracing for more potential damage. The JOBS Act — aimed at reducing regulatory burdens for smaller companies — is still subject to implementation via SEC rules which are currently in process. Aside from the fact that the disclosure requirements of issuers availing themselves of JOBS Act-endorsed shortcuts are already laughable in their deficiency, some of the same law firms bent on passage of the Act in the first place are now out to further weaken the requirements.
Here is just a flavor of the things these law firms want omitted from any prospectus trying to sell these miscellaneous ventures, known as “emerging growth companies” (EGCs), to the public. Just as a reminder, these are things that are generally required disclosures of any typical company seeking public capital.
- EGCs would not have to disclose anything about backlogs for their products or services. (We cannot tell if this is because they don’t have a product or just no backlogs?)
- EGCs would not have to disclose any market-related risks for their businesses, such as interest-rate, foreign-exchange, or commodity-price risks.
- EGCs would not have to tell potential investors anything about how much they will be diluted. This is “not meaningful to investors,” the letter states.
- EGCs would not have to tell potential investors about any recent sales of unregistered securities, that is information about their earlier rounds of financing or material contracts to the firm. (We could only think of about 10 reasons why investors would want that specific disclosure).
- Finally, EGCs would not have to disclose how they plan to use the proceeds of the offering.
You get the picture — hazardous material these offerings. The lawyers take the view that adequate disclosure is all too expensive, of little or no relevance to IPO investors, or can be found by scrounging around in subsequent financial and other types of filings from the company, once public.
As an attorney myself, I am very familiar with that old adage, “We are lawyers, and we are just here to help.”
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