Facebook's Rocky IPO Might Spur Reforms

Mark Zuckerberg speaks during the remote opening bell ringing cerermony for the opening of trading at the Nasdaq MarketSite. Photograph by Zef Nikolla/Facebook via Bloomberg

Facebook’s initial public offering had more bumps than an unpaved road after a Midwestern winter. The exchanges went haywire, the stock plummeted, the Nasdaq boss was on a plane, incommunicado. All those potholes have prompted both chambers of Congress to examine the way companies go public and are traded.

On Wednesday, the Senate Banking Committee looked at whether the IPO process works for retail investors, while the House Financial Services Committee’s hearing focused on whether U.S. stock markets are reliable.

Nasdaq OMX Chief Executive Officer Robert Greifeld declined an invitation to testify before the House hearing, Bloomberg News reported last week. Greifeld, who opened the May 18 trading day in California with Facebook executives, was traveling back to New York when the trading problems surfaced, the Wall Street Journal reported on June 11.

In the Senate, several panelists expressed concern that large institutional investors may have had access to more information about Facebook’s future prospects than retail investors did. “The deck is stacked against us,” said Ilan Moscovitz, a writer and analyst for the Motley Fool website.

The panelists proposed several fixes. For example, many companies post online—as Facebook did—a version of the roadshow presentation they make to big investors. Ann Sherman, an associate professor of finance at DePaul University, says those videos are tightly scripted. (Bloomberg Businessweek’s Jim Aley reviewed Facebook’s roadshow movie for its production values.) Still, Sherman says individual investors miss the Q&A portion of the roadshow, which provides not only greater information but a chance to evaluate how top executives interact and handle tough questions. Both Sherman and Lise Buyer, a consultant who worked with Google on its IPO, told the Senate panel they support making a Q&A available online; this could be recorded from presentation to institutional investors or hosted as a live-streamed session answering questions from Main Street investors.

Several panelists also said the situation for retail investors is getting worse because of the JOBS Act, which Congress passed in early April. The law loosens the reporting requirements for companies that have less than $1 billion in annual revenue and wish to go public. Moscovitz said it will lead to increased low-quality IPOs. “Think more Pets.com than Google,” he said. Moscovitz said the $1 billion limit was too high and that Congress should lower the threshold at which companies must fully comply with accounting and reporting rules.

In the House, the hearing looked at a range of issues, including high-frequency trading and the rise of so-called dark pools that move trading onto private platforms. Duncan Niederauer, CEO of NYSE Euronext, said people have lost trust in the market. “What used to be an investors’ market is now thought of as a traders’ market,” he said.

In his testimony, Dan Mathisson, a managing director at Credit Suisse Securities, said exchanges such as NYSE and Nasdaq should be legally liable for major problems like the software glitches that plagued the Facebook IPO. “We believe the best way to reduce the chances of similar technology problems from occurring in the future is to remove protections which grant exchanges ‘absolute immunity’ from liability,” he wrote.

When major technical problems arise, as Nasdaq encountered with the Facebook IPO, other players are left in the dark, said William O’Brien, a former Nasdaq executive who is now CEO of Direct Edge Holdings, a Jersey City (N.J.) company that owns exchanges. “No hotline, no market-wide escalation procedures, no nothing,” O’Brien said in written testimony. He said that during trading failures, better coordination among trading sites is needed to stop problems from cascading. He also called for greater SEC oversight of the technology that runs exchanges.

Most of the suggestions Congress heard on Wednesday were not new ideas—the Facebook IPO just provided a recent and stark reminder of problems that persist.

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