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After Facebook, lawmakers pushing for IPO overhaul

The loading screen of the Facebook application on a mobile phone is seen.
The loading screen of the Facebook application on a mobile phone is seen.Valentin Flauraud / REUTERS

Lawmakers are pushing for an overhaul of the IPO process after the debacle over Facebook’s public offering last month, which has seen the social network’s share price slump 17 percent from its initial offering price.

In a letter to Securities and Exchange Commission Chairman Mary Schapiro, Rep. Darrell Issa, R.-Calif., is pushing the agency to overhaul the rules for pricing and disclosing information in IPOs. The letter, which Issa wrote on behalf of the House Oversight and Government Reform Committee, argues that the current system is weighted against smaller investors.

“It appears that underwriters have discretion to determine the price of an IPO, while subject to conflicts of interest stemming from economic relationships with those institutional clients that ultimately will purchase the bulk of an issuance,” Issa wrote.

“In conjunction with this discretion, communications restrictions and legal liability enable underwriters to provide information to institutional clients, while precluding access to the broader public,” Issa said in the letter. “Given the concerns surrounding the Facebook IPO, Congress and the Commission should take a deeper look into this regulatory structure.”

Facebook’s founder Mark Zuckerberg and the banks running its initial public offering have been sued by disgruntled shareholders, who argue that the social network’s revised growth figures were disclosed to a select group of clients, rather than broadly with all investors, ahead of its offering.

Issa’s letter pushes the SEC to speed up its investigation into how Facebook’s IPO was handled. The regulator is also looking into technical glitches at the Nasdaq Stock Market that led to confusion on Facebook’s first day of trading. Many investors, both institutions and individual retail, were left uncertain about how many shares of Facebook they owned and the price at which they had bought them.

The SEC is also looking into whether the banks underwriting the Facebook deal broke any securities laws by allowing warnings about Facebook’s business prospects from research analysts to be passed along to a set of exclusive clients, but not the general public. Morgan Stanley, the lead underwriter on the deal, has said it fully complied with the rules for IPOs.

“I don’t believe Morgan Stanley did anything wrong from a disclosure standpoint,” said David Menlow, president of the research firm IPOfinancial.com.

“I would point to the fact that nine days before the offering the company filed the amended S1 document with the information that shows the change everyone says they didn’t know about,” Menlow added.

However, there does seem to be a general problem with how information about IPOs is disseminated to all investors, Menlow said.

“Big institutional investors seem to see more information than retail investors, but that’s not just at Morgan Stanley; that’s systemic,” he said.

The decline in Facebook’s share price since its IPO has fallen heavily on individual investors.

Facebook reportedly set aside some 25 percent of its shares for regular retail investors -- or about 105.3 million of the 421.2 million shares the company said in a regulatory filing that it expected to sell in its public offering. A typical IPO would normally allocate around 15 percent of its shares to retail investors.

If that group of retail investors had purchased shares of Facebook at the IPO price of $38, by Thursday the collective value of that investment would have declined in value by $653 million -- a drop of 16.3 percent.

While major investment houses and hedge funds were allocated stock in Facebook before it went public, individual investors had to wait until after the IPO to buy shares in the open market.

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