Commentary: Wanted: A Good Cop For Europe's BoursesWilliam Echikson
Nina Brink ought never to forget that this is the Information Age. Asked in early March about her stake in World Online International Inc., a Dutch Internet service provider at which she is CEO, Brink replied, "I don't want to answer." That was arrogant--and costly. A week after World Online was floated on Mar. 17 in Amsterdam, investors learned that Brink had sold a good chunk of her shares three months earlier--at a bargain price, no less. World Online's shares fell fast: If the founder was a seller, why should outsiders buy in? The stock now goes for less than half its $42 offering price.
Europe's stock markets need a good cop. A strong equivalent of the U.S. Securities & Exchange Commission, enforcing a single set of rules, might have prevented the World Online debacle. And there's no time like now. Europe's share-owning culture is still shallow and can't easily absorb shocks triggered by stock scandals. A crisis of confidence would make it hard to sell the idea that savings should be put into equities.
Listing requirements are a particular concern. Clear, timely information about management shareholdings must be available, and underwriters must insist that managers "lock up" their shares for at least six months. At the same time, tighter rules should not deprive promising high-tech stocks--some with no track records, some with startup losses--of market capital. Amsterdam's exchange was right to drop its rule that companies report three years of profit before they list. But channeling funds to high-risk ventures is no reason to let regulators or startups cut corners.
World Online, a four-year-old company, is exhibit A in this case. Its offering prospectus reports that Brink "transferred" 6.35% of World Online's shares to two shareholders and a U.S. hedge fund, Baystar Capital LP. And Baystar, the prospectus revealed, did not agree to lock up its shares. Sure enough, Baystar sold more than a million shares of World Online in the first three days of trading. ABN AMRO and Goldman Sachs & Co., World Online's bankers, admitted a week later that "transferred" meant "sold."
True, the banks asked some institutional investors not to sell for a quick profit. Brink even encouraged employees to borrow against their salaries to buy options. Now, Goldman says investors should have paid more attention to the fine print. "All the relevant material was included," says spokesman Simon Eaton. O.K., but Goldman printed the prospectus just two weeks before the listing. Amsterdam brokers say many investors didn't see it.
The Amsterdam authorities may now require that prospectuses be issued two months before IPOs and be distributed over the Net. Underwriters should welcome reforms as a way of restoring confidence. That's essential now. While there's provision in local law for shareholder suits, they remain rare. Most countries have securities commissions, but cases against offenders can get lost in the courts for years. A Euro SEC with sharp teeth would help, while eliminating what is now a maze of regulatory regimes. Proposals for SEC-style regulation are years away from being adopted. But as World Online has shown, Europe doesn't have years to spare.
With World Online's stock falling, Brink admitted on Apr. 3 that Baystar paid $6 a share for her stock, for a total of $61 million. She also had an agreement with Baystar to split the profits on a resale of the shares. Baystar now agrees not to sell more of its stake until Sept. 15. But Brink may still face legal action by a group of investors. "I would like to express my profound regret for the commotion in the market," Brink says.
Commotion is the word for it. World Online's IPO, which raised $2.9 billion, making it Europe's biggest Internet IPO to date, has cast a pall over the markets, which were scheduled to float $8 billion worth in new Net stock for the first half of this year. "Investors are now demanding more information," says Edwin van Zuidam, an Internet analyst at MeesPierson, a Dutch investment bank. The investors are right.