More Press Scrutiny of Correspondence During the IPO Comment Process
By Cydney Posner
This Bloomberg article, Manchester United Resisted SEC on IPO Risk for Investors, provides yet another cautionary tale about how the press can interpret (or perhaps misinterpret) statements made in the correspondence that is part of the SEC comment process. As has been the case with other recent highly publicized offerings, the press is now scrutinizing the SEC correspondence as soon as it is available to see if there might be a story in it. Even fairly commonplace comments and responses are examined and presented with fresh eyes. The company's responses to SEC comments can look especially embarrassing when the company resists an SEC comment that turns out to be meritorious. Something to keep in mind when drafting the prospectus and crafting responses to SEC comments….
This piece is about the Manchester United IPO, whose team owner, the article reports, "is so loathed by fans that some once burned him in effigy. They might hate him even more if they learn how he tried to hide the true state of the soccer club's finances before its August initial public offering. The struggle to keep secret the material risks the storied team faces is detailed in letters between club executives and the U.S. Securities and Exchange Commission before United's August IPO. The SEC demanded and got more disclosure about team losses, debt and benefits for [the team owner and his family]. What investors and fans weren't able to see until a month after the team raised $233 million selling shares, was the owners' behind-the-scenes resistance to disclosing more transparent earnings data, details about [the team owner's] debt and what the IPO money was to be used for. The article also characterizes the correspondence as "typical of the regulator's reaction to an initial IPO prospectus that is found wanting in alerting investors to the risks of buying new shares. [Although the team has done well, the] SEC was less impressed with the way the team laid out its finances in its initial IPO papers. After a review, the agency made [the owner] show the team hid losses with a one-time tax credit and an 80 million-pound sale of [a] player… according to correspondence posted on the SEC website Sept. 7. The SEC forced Manchester United to disclose how [the owner] had repaid 10 million pounds borrowed from the club by extracting the same amount from team coffers as a dividend paid to him.,,,"
The article goes on to complain that the selling shareholder wasn't named until the SEC demanded it, nor were certain affiliates. The SEC also asked for more disclosure about the class B shares and about family control of the team: "The SEC had to make two or three demands for some disclosures, including on Cayman law and operating losses." Although the prospectus described broadcasting and match revenue "as growing consistently," the SEC said that United in fact "would have lost money in two of the last three years but for the extraordinary results due to the sale of a player." The SEC also required the company to disclose that the company would have a loss in the latest nine months, too, but for an unusual tax credit. Post-IPO, United reported a net loss of 15 million pounds for the June 30 quarter.