After Facebook: US politicians call for regulatory review of IPO process

No wonder investors are happy, so happy in fact that their catcalls, curses and imprecations can be heard echoing up and down the concrete and steel canyons of Manhattan in the east to Palo Alto in the west and anywhere else on the planet that a worse-off, hacked-off, shareholder might feel the urge to let rip with a primal scream of rage.

In just a few weeks angry stockholders have filed more than 40 lawsuits against Facebook, its underwriters and the Nasdaq, while lawyers are seeking to consolidate the seething, bubbling mass of writs into a single massive claim and trial.

Meanwhile, the US Securities and Exchange Commission (SEC) is undertaking a separate investigation into what happened at the Nasdaq stock exchange before, during and after the floatation.

Investor and media concerns are so vocal and persistent that even the most somnolent US authorities are waking up and coming round to the idea that the whole IPO process, from start to finish, needs to be examined, de-constructed, redesigned and re-regulated - not least because the US economy is still in a mess and the last thing the country needs is a collapse in confidence in the workings of capital markets. If that happens another Great Depression could follow - with incalculable results for the entire world.

It's all to do with trust and investors are beginning to lose it as far as IPO's are concerned. On Sunday last, Robert Greifeld, Nasdaq's CEO, speaking at a conference held in the Law School at California's Stanford University (and that's within hollerin' distance of that nice young Mr. Zuckerberg's skateboarding park and corporate HQ) accepted that “arrogance” and “overconfidence” played a big part in the Facebook float farrago and that the Nasdaq itself was not sufficiently prepared to handle the sheer volume of hysterical 'buy' and 'sell' orders that quickly overwhelmed the system.

But there's more wrong with the IPO system than just hubris and a software malfunction. The small investors, on whom the US was built, simply don't get a fair crack of the whip.

The system is skewed towards big money and institutional investors as the bankers, analysts and other insiders get the skinny whilst John Doe and GI Joe get dumped on.

Let's look at the Facebook floatation: the notion, and regulatory requirement, is that companies about to go public have to give all their potential investors the same information about the IPO at the same time.

However, lawyers acting for cohorts of aggrieved punters (because that's what an IPO is, a punt; a hopeful wager in what is, in reality, a gambling joint by any other name) are claiming that Facebook's pack was stacked because senior staff at the social networking company provided the underwriters (led by Morgan Stanley) with more information about the reality that it's mobile advertising arm was unlikely to meet forecast revenue and profit targets than it did to the public who, as individuals, would be investing comparatively little in comparison with the big institutions.

Those underwriters then reduced their financial forecasts and released the new, less favourable figures to what are being described as "selected clients" and this group did not include Mom and Pop down at the corner store or any other member of the public without a few million bucks to plough into the market, and then withdraw again within seconds having made a big fat profit.

This cynicism and profiteering isn't new but it still smells as rank as much as ever it did. Something's rotten right enough, but it's not in the state of Denmark, it's in Lower Manhattan and not unadjacent to Wall Street.

There is a glimmer of hope though. At long last a politician of two sees some potential advantage in questioning the morals and mores of company floatations that distort the market. Last week, Darrell Issa, a California Republican, sent a letter to Mary Schapiro, the chairperson of the SEC, demanding a full regulatory review of the IPO process. He wrote, “The Facebook IPO taught us that, at a minimum, the IPO process suffers substantial flaws. In fact, it appears the entire IPO regulatory framework, based on an outdated Securities Act of 1933, fails to provide a market-based solution to IPO pricing.”

To put things in perspective, 1933, when the Securities Act was passed, was 79 years ago, the same year that work began on the construction of the Golden Gate Bridge across San Francisco Bay and the first Krispy Kreme doughnut was sold. Also in 1933 the US government made marijuana illegal - a piece of legislation that has been as conspicuously successful as was the Volstead Act that ushered in Prohibition and all the institutionalised gangsterism that came with it. The Blaine Act that repealed Prohibition came into force in 1933, but the gangsters decided to stay in operation and looked elsewhere to turn a buck or two.