Pigeons At The Table
The Securities and Exchange Commission is reviewing whether it should relax rules governing what companies can say ahead of initial public offerings, following the much debated, and publically scrutinized, debacle that was Facebook's May stock sale.
In my opinion, the entire IPO process needs to be reviewed in light of recent advances in communication and trading. Facebook is simply the latest – but arguably the most visible -- example of why the business of selling a chunk of equity is a massive undertaking that can crush a miniature investor.
Specifically, the SEC is reviewing the "quiet period," a window of 40 to 90 days prior to a public offering when there is a ban on a company discussing its prospects. Despite and possibly because of this mandatory silence, the hype surrounding the Facebook IPO soared to heights not seen since the tech bubble of the late-1990s.
The problem is that this hype led an uninformed public into the frenzy of buying shares with little access to the underlying financial realities and estimates that may have deterred their exuberant rush to "like" the stock.
Meanwhile, institutional investors were fed information directly by research analysts who had access to updated information from Facebook. While the underwriting companies did not do anything illegal, one has to question whether the playing field is level. The outcome of the IPO may have been much different had retail investors been given the same heads up on the same information, at the same time as the pros managing multi-billion-dollar university endowments and hedge funds.
While SEC Chairwoman Mary Schapiro is reviewing the "quiet period" – she should go further and review the whole IPO process. In recent years, advances in communications, information analysis and high-speed trading have tilted the investing landscape drastically against retail investors. Schapiro should not only be making sure small-time investors have access to the same information as Wall Street professionals, but that they are given a fair shot at buying IPO shares.
Most retail investors, who are just trying to grow their retirement savings, have become the proverbial "pigeon at the poker table" – a dumping ground where institutions unload shares after they "pop." Of course, an unprecedented amount of money continues to flow out of mutual funds that buy stocks. The pigeons may be catching on, regardless of what Schapiro does to protect them.