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Chapter 16. Reforms to Protect Small Inv... > New Regulations to Protect Investors...

New Regulations to Protect Investors in IPOs

At the heart of the bubble and all its damaging consequences was the IPO process. The abuses of the process were not limited to who was allowed by the bankers to participate in the lucrative IPO process, and on what terms, though this aspect has been attracting the most attention in Washington. To better protect the interests of the retail investor, we propose a set of rules of the following nature:

  1. A venture capital firm and its investors cannot sell an investment in an IPO except on a phased schedule, for example, up to one third of its stake after six months following IPO; another third after nine months, and the final third one full year after the IPO. And any such sales must be reported to the government as insider trading.

  2. All insiders must sell on a program basis for the first two years after IPO. A program basis for insider sales is a preregistered plan of selling over a lengthy period of time from which there is no departing with a changing price for the stock.

  3. Underwriters on an IPO have to certify that the business is real—especially with respect to revenues, if the company is being offered to the public without the traditional several quarters of profitability, and must forecast within a range the financials for the first year following the IPO—and can be sued if the company fails to meet the forecasts in the first year after IPO.

  4. Investment banks should be required to engage an independent accounting firm to review the financial statements of firms which are candidates for IPOs.

  5. In such a situation as mentioned in the point before, legal liability should go to the representations of the underwriters with no protection from the boilerplate of a prospectus accorded them.

  6. An underwriter should not offer a company to the public without a minimum size float. During the bubble, many Internet stocks had very few shares in the public markets so that buying activity could much more easily drive prices up, and later, selling activity could much more easily drive prices down. In some instances during the bubble, multiples of the entire number of shares outstanding of a stock would trade in a single day.



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