Aren’t you glad the government fixed the IPO market?In the old days (the 1990s), small companies could sell their stock in the public markets at reasonable cost, just like big companies. This allowed smaller, more speculative companies to raise money, and it gave investors who liked to invest in smaller, more speculative companies more opportunities to consider.
In those days, investors who liked speculating on risky tech companies had plenty to choose from. Risky tech companies, meanwhile, could raise capital easily to fund their growth.
And how did both sides do? Well, sometimes these speculative bets worked out (Cisco, Amazon, Netscape, Yahoo, et al). Sometimes they didn’t (hundreds of other companies that seemed like a good idea at the time). But both sides understood–or should have understood–the risks involved, and the market facilitated the free flow of capital and served both constituencies.
But then, in an effort to protect investors from fraud (which is actually not the reason most IPOs fail), the government erected huge new barriers to going public, making it prohibitively expensive for most small companies to IPO.
So now small, speculative companies generally don’t IPO.
Instead, they stay private. And/or they do what Facebook just did, which was do a “private IPO” with Goldman Sachs.
What’s a private IPO?
It’s a mechanism in which Goldman’s rich clients can invest in Facebook. But you can’t.
One of the reasons Goldman just invested in Facebook was to create the ability for its clients to invest in Facebook–through a “special purpose vehicle”. Specifically, Goldman has bought the right to buy $1.5 billion of Facebook stock for its clients via a single private investment entity. Goldman’s clients who want to invest in Facebook will be given shares in the investment entity. And if the value of those shares rises, they’ll cash in.
Voila! The private Facebook IPO. Just for Goldman clients.
Does this new system–private IPOs only for Goldman clients–improve our financial markets? Are we–and you–better off now than when more companies wanted to go public and public-market investors were free to make their own decisions about what firms they wanted to invest in?
Specifically, is the economy better now that you are prevented from considering investments in small, speculative companies–and smaller companies have fewer and more-expensive ways to raise capital?
Certainly not from where we sit.
This is not about fraud. Fraud is bad, and companies that actually defraud investors should be punished for it (and they were, before the new rules).
It’s also not about–or shouldn’t be about–preventing investors from making bets that cost them money. On every trade–every single trade–there is a winning side and a losing side. Anyone who buys and sells stocks, or makes any other kind of investment, has to accept that. And the reason that many speculative IPOs end up being worthless is NOT because the companies committed fraud. It’s because whatever investment they were making didn’t work out.
What this IS about is facilitating the free flow of capital–an arena in which America used to lead the world.
This is about allowing investors who voluntarily choose to take investment risks to take them and allowing small, speculative companies–the engine of our economy–to raise capital in the most efficient way.
So, Congress, can we at least consider relaxing some of the reporting requirements that make IPOs so expensive for small companies?
And if, after considering that, Congress, you really think investors need to be protected from risking their own money on small, speculative investments, can we consider another solution?
Specifically, can we consider creating another public market, like London’s AIM, that is specifically for small speculative investments?
This new public market would have less-stringent listing and reporting requirements than the NASDAQ and NYSE. It would cost less to go public there. Fraud would still be punished there. And investors who wanted to buy stocks on this market would be required to sign statements saying they understood the inherent risks.
Basically, it would be a more open version of Second Market and the other private markets that have sprung up to meet this new need for small-company liquidity.
And if and when companies achieved the size and maturity in which they wanted to make they jump to NASDAQ and NYSE, they could pay more and meet the more stringent listing requirements. It would be like graduating from college!
Why would we want to create a new market like this?
Because the current system, in which only Goldman Sachs clients can invest in companies like Facebook, is no good for anyone (except Goldman Sachs clients).
This is not about fraud. It’s about the free flow of capital. And it’s about time America led the world in this arena again.
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