On June 19, the Committee on Oversight and Government Reform of the U.S. House of Representatives asked the Securities and Exchange Commission to answer 34 questions concerning the initial public offering market in the United States. The Committee’s inquiry came less than three months after the enactment of the JOBS Act, which, among other things, eased regulatory restrictions on initial public offerings by Emerging Growth Companies.
The Committee’s questions focused principally on the process by which issuers and underwriters determine the price and allocation of IPO shares. In particular, the Committee asked:
- whether the discretion inherent in the current IPO book-building process leads to pricing errors;
- whether the persons who determine IPO prices have conflicts of interest;
- whether IPOs have been historically over- or underpriced and whether the frequent increase in market prices relative to IPO prices are a sign of market inefficiency;
- whether market prices after an IPO are a better indicator of value than the prices determined from the book-building process;
- whether a Dutch auction system, such as the one used by Google in its IPO, in which the IPO price is set at the highest level at which all the offered shares can be sold, would eliminate pricing discretion;
- whether allowing short sales in Dutch market IPOs would make auction pricing more accurate; and
- to what extent IPO shares have been historically allocated to institutional investors relative to retail investors.
In addition, the letter probes securities rules and regulations that limit the type and amount of information provided to non-institutional investors, particularly with respect to the quiet period surrounding an IPO, publicity, analyst research and forward-looking statements. It appears, from the direction of the Committee’s questions, that the Committee may want to explore revising existing rules to permit increased disclosure to retail and other investors. The Committee’s communications-related questions included:
- whether the quiet period rules provide institutional investors with informational advantages over other investors or otherwise inhibit price discovery;
- whether restricting ordinary investors’ access to marketing materials protects investors;
- whether new media for the dissemination of information, such as blogs, or the existence of proprietary traders and hedge funds reduces the risks posed by exaggerated claims ("puffing") during the offering process;
- whether issuers and underwriters are subject to unnecessary litigation risk with respect to earnings forecasts and other forward-looking statements made in IPOs; and
- whether protections for issuers and underwriters with respect to such forward-looking information should be expanded.
A link to the letter is below: