Congressmen Seek IPO Process Overhaul

By Cydney Posner

Rep. Darrell Issa (R., Calif.) seems to be a busy guy these days, but, according to the WSJ, not too busy to write, as Chair of the House Oversight and Government Reform Committee, to SEC Chair Mary Schapiro requesting that the SEC look into revamping rules for pricing and disclosure in IPOs.  The letter was prompted by Facebook's "steep share-price decline since its May 18 offering," which he viewed as "a sign that investment banks are able to ‘dictate pricing while only indirectly considering market supply-and-demand.'"  A major concern is that "U.S. capital markets could get weaker if the law continued ‘to protect, over-regulate and coddle our financial institutions.'"

Arguing that the "IPO process suffers substantial flaws" and that the 1933 Act is  "outdated,"  Mr. Issa requested responses from Ms. Schapiro to 34 questions.  One question raised was whether restrictions on communications with investors during the IPO process inhibit price discovery. Mr. Issa also raised concerns regarding the current "book building" system used by investment banks to set IPO prices, wondering whether Ms. Schapiro would instead favor the auction method used by Google for its IPO.

On a similar note, in an interview with the WSJ, Sen. Jack Reed (D., R.I.), Chair of a subcommittee of the Senate Banking Committee, concurred that regulatory changes are needed to bolster investor confidence, particularly in light of the concern that retail investors are at a serious disadvantage.  Mr. Reed agreed that "a move to an auction system was one option for change. At his committee's hearing, experts also backed the approach used by some countries of setting aside a fixed-price tranche of shares for retail investors. Changes are needed to assure small investors they will be treated fairly, Mr. Reed said. ‘If they feel the system is pitted against them, they won't participate and we'll lose their contribution to capital formation,' he said in the interview."

Commentators questioned whether auctions were the answer, arguing that, unlike an auction of a painting, the issuer of shares is concerned about the long-term intentions of the buyers of shares.  Others argued that investment banks "play an important role in IPOs" because the banks' salesmen are critical in locating buyers, especially for companies that are not well-known brands. 

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