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.

 

Advertisements

The Facebook IPO Trainwreck

No one is covering themselves in glory in the aftermath of the Facebook IPO.

Lead underwriter Morgan Stanley is battling allegations that it priced the deal too richly.

Facebook insiders are being called greedy for the last-minute increase in the number of shares they sold in the offering.

Facebook’s management is being criticized for signaling analysts to lower their revenue estimates just days before the deal priced – a move that could be a violation of securities laws.  It also appears some institutional investors were informed of the analysts’ downgrade but retail investors were not.

If all that wasn’t enough, Nasdaq has endured a barrage of complaints for breakdowns in its system on the first day of trading that left investors in the dark about the status of their orders.

Predictably, regulators are launching investigations, legislators are scheduling hearings and plaintiff attorneys are filing lawsuits.

This is hardly the place Facebook wanted to be after completing its IPO.  Nor is it encouraging to other firms that are thinking about going public.

Morgan Stanley is clearly in the hot seat. The firm issued a statement late Tuesday defending its actions, but it is standing on narrow ground, asserting that its procedures were “in compliance with all applicable regulations” and that it handled Facebook in the same manner as every IPO.   That’s not enormously reassuring but it may be all it can say right now as it gathers the facts.

Nasdaq also has a lot to answer for.  Its systems are meant to handle high transaction volumes, and its people are expected to test and monitor the infrastructure to prevent these kinds of problems.  It’s not reassuring to hear Nasdaq executives admit they underestimated the scale of the technical problems.  Nasdaq needs to give guidance quickly on how it will address investor losses and repair the weaknesses in its systems.

Even if Facebook shares recover, the events of the past few days will linger in the minds of investors.  It’s too early to know if it will lead to changes in the IPO book-building process, which hasn’t changed much in the past half-century.  If it does, Facebook in its own way will disrupt Wall Street, just as it upended the media and technology sector.

Advice for Eduardo Saverin

Here is some advice for Eduardo Saverin and misunderstood billionaires everywhere: Just. Be. Quiet.

Stung by criticism that he relinquished his U.S. citizenship to evade tax on his fortune, Mr. Saverin gave an interview to the New York Times.  He no doubt believed that a sit-down with a Times reporter to “set the record straight” would reverse the impression that he is lucky, greedy and aimless.  It did not.

He comes across as, well, lost:

Of all the founders, Mr. Saverin has had perhaps the greatest difficulty figuring out how to build on what is likely a once-in-a-lifetime experience.

On the tax issue, Mr. Saverin essentially confirms reports that he wanted to avoid paying U.S. tax by giving up his citizenship and establishing residence in Singapore.  He also awkwardly tries to explain how he has been spending his time and money since leaving Facebook:

What has gotten attention, though, is his billionaire playboy lifestyle in glittering Singapore. Thanks to the interconnected world Mr. Saverin helped to create, the Internet is full of people sharing photos and stories of him embraced by statuesque women and drinking expensive Champagne. “It’s a misperception, especially the playboy,” he said. “I do have a Bentley. I do go out. I’d rather not go into personal details.”

Oh, and that movie was all wrong about him, too:

He also said the depiction of him in the movie “The Social Network” was distorted. “It was more art than documentary,” he said. As to his purported betrayal by Mark Zuckerberg, chief executive of Facebook, the dramatic core of the movie, Mr. Saverin said: “There was no burning there. Mark is a phenomenal guy.”

Mr. Saverin is not alone in having a misplaced belief in his own persuasive powers.

Corporate chieftains, hedge-fund titans and technology wizards often believe that with enough time, coffee and charm, a reporter can be persuaded to take a sympathetic view of their plight.  If it’s People magazine, maybe; but not The New York Times.

The better course for Mr. Saverin would be to do something useful – start another wildly successful company or give a bundle to charity or support a cause he feels passionate about.  All of that is much tougher than a press interview, of course.

The lesson is, until you change the facts, don’t expect a different story.  Until then, please suffer a little adverse press coverage quietly and in the comfort of your enormous yacht.