Schapiro noted in her letter, however, despite that greater flexibility, investment banks may choose not to disseminate broadly their research and may provide different research products to different types of investors. The SEC does not mandate that research reports be made publicly available. Moreover, although the SEC has liberalised offering communications and underwriters have the opportunity to use “underwriter” free-writing prospectuses in order to make available supplemental information about an issuer or the offered securities, in practice, these are rarely used. Issa’s letter also inquired whether there should be
broader safe harbours to address the inclusion of forward- looking information and projections in prospectuses and in free-writing prospectuses, and asked the SEC to consider whether additional safe harbours should be adopted to protect communications, including forecasts, made in research reports. Schapiro noted the existence of safe harbours
for certain forward-looking
communications. She also pointed out that liability would not extend to a research analyst’s failure to predict accurately an issuer’s future performance. This most recent Issa-Schapiro exchange makes for
interesting reading, and may be the beginning of a broader discussion related to offering communications, and a further levelling of the playing field as between retail and institutional investors. We would anticipate that the SEC will continue to consider the regulations applicable to offering communications.
The structure of IPOs The Issa letter to Schapiro also raises some fundamental questions regarding the structure of IPOs in the United States, where the book building process has long been relied upon for public offerings. As part of the book building process, underwriters will meet with institutional investors and the issuer and the underwriter will conduct a road show that will include in-person meetings with groups of institutional investors. During the marketing process, the underwriters will gather informal indications of interest from institutional investors about the extent of their interest in an investment in the issuer’s securities, and their pricing sensitivities. Over the marketing period, the underwriters begin to form a book of interest based on these conversations. Issa questions whether this traditional book building
approach allows the underwriters to exercise too much discretion over the IPO process, and questions whether the approach may be fraught with conflicts that may lead to inaccurate pricing. Issa cites to the experience of the Facebook IPO. He also wonders whether the process has
the effect of foreclosing opportunities for meaningful retail participation in IPOs. Finally, Issa asks the SEC to comment on whether it has considered whether alternatives, such as auction-based pricing, would be more beneficial and potentially less subject to overpricing and conflicts of interest. Again, this is another area that had been explored many times before Issa’s letter. The IPO Advisory Committee in 2003 considered whether alternatives to the book building approach should be advanced. In other jurisdictions, there are examples of modified book building approaches, where specified percentages are reserved for retail investor orders, as well as examples of auction-based approaches. Academics have devoted substantial attention to considering whether book building or auction-based approaches are beneficial to issuers and investors. In fact, Schapiro in her response to Issa provides a very thorough survey of the leading academic literature on IPO under-pricing and the advantages and disadvantages associated with the book building and the auction-based models. More or less at the same time, the US Senate Banking Committee’s Subcommittee on Securities, Insurance and Investment held hearings examining the IPO process. Legislators had as their objective considering whether the IPO process is fair and transparent, and whether the IPO market operates effectively for both institutional and retail investors. Dr Ann Sherman provided testimony regarding the IPO methods used in different countries and commented on the costs and benefits of various approaches, concluding that retail investors are unlikely to contribute to more accurate IPO pricing. Sherman and other participants in the hearing did conclude that there was unequal access to information regarding IPOs. Sherman suggested requiring issuers to make their road show materials publicly available. Others suggested extending the application of Regulation FD in order to make certain that retail investors had access to the same information that was provided to institutional investors. It is likely that academics, legislators and the SEC will continue to consider changes in the IPO process in the near future.
Disclosure requirements The JOBS Act’s IPO on-ramp provisions attempt to streamline the disclosure requirements for EGCs undertaking an IPO; however, as we discuss in Chapter 1, in practice, market participants have been reluctant to take full advantage of certain of these benefits. The SEC also is mandated by Title I of the JOBS Act to undertake a study of the disclosure requirements set forth in Regulation S-K. Many practitioners have noted that even with the scaled
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