Crowdfunding Loses its Appeal after the Facebook IPO

As Facebook’s shares continue to slump, recriminations over its busted IPO continue with no end in sight.  It might also prompt fresh concern about the JOBS Act, which loosens the rules on capital raising.

Regulators and plaintiffs’ attorneys are circling Facebook and its advisors.  Bankers, company officials, early stage investors and Nasdaq are all coming in for criticism. Even the glassy eyed retail investor is being blamed for assuming Facebook was a risk free way to be a hedge-fund titan for a day and make a quick killing.

But here’s the thing: For all the finger pointing, it’s likely that the Facebook and its bankers complied with the IPO rules. Yes, Facebook’s disclosures weren’t all that clear, and the underwriting banks’ analysts kept their earnings downgrades away from the public, but all this was acceptable under the rules.

The rules are set to change, and in ways that don’t favor retail investors.  So if small investors are feeling burned Facebook, just wait until bankers start crowdfunding growth companies under the provisions of the new JOBS Act.

Under the law, enacted just weeks ago, companies with under $1 billion in revenue will be able to tap the public markets without many of the restrictions that govern IPOs today. They’ll be exempt from disclosure and corporate governance requirements. Small companies will also be able to crowdsource their funding – soliciting investors via the Internet – without filing a registration statement. The information disadvantage for retail investors looks likely to grow worse under the new law.

Many of the protections put in place in 2003 after the collapse of high flying tech companies are also eliminated. (Ironically, the JOBS Act would permit underwriters to publish research on companies before an IPO, which some have argued would have been useful for retail investors eyeing a flyer on Facebook.)

The SEC is not very enthusiastic about the JOBS Act, and it has begun to gather public comments as it develops rules to implement the law. Facebook’s disappointed shareholders should be writing to Mary Schapiro.

 

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One thought on “Crowdfunding Loses its Appeal after the Facebook IPO

  1. If Facebook had Crowdfunded their IPO, it would have fared much better, because the Algorithmic trading would have been less influential in the fall of the stock. Fewer shares would have been held by many more people. They could have created a massive online community of owners and had direct contact with their shareholders.
    MediaShares could have really helped them avoid their disastrous opening.
    Gene Massey – MediaShares CEo

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