May 23, 2011

The PCAOB’s Nomination Process: SEC Adds a Little More Transparency

One of the oddest provisions of Sarbanes-Oxley was Congress creating the PCAOB with a dotted line to the SEC. I’m not sure that this was an obligation that the SEC wanted, particularly after a lawsuit involving this unusual regulatory framework (ie. one regulator reporting to another) wound up in the Supreme Court. After its SCOTUS victory, the SEC posted written procedures for appointment of a member or chair of the PCAOB in November.

Now that the SEC is actively seeking a PCAOB board member with a CPA background, it has taken another new step – posting information about this job search and even posting “sample letters” that it sent on Friday to 14 leaders in the financial industry seeking their input (egs. Ben Bernanke, Timothy Geithner, Jim Doty).

The SEC’s New Chief Economist and Risk Fin Director

On Friday, the SEC announced it had hired Vandy Professor Craig Lewis to serve the twin roles of Chief Economist and Risk Fin Director. Craig has some awkward shoes to fill in the new Risk Fin Division in the wake of this Reuters article about the inaugural Director Henry Hu’s perceived lack of accomplishments and his unusual reimbursement arrangement with the agency.

The LinkedIn IPO: A Favorable Comparison to the Internet Bubble Years

An anonymous member sent in these thoughts on last week’s IPO by LinkedIn:

In the LinkedIn IPO, I was glad to see that:

1. a rational pricing of the security;
2. the company’s CEO down-played the market performance of the stock on the first day; and
3. the prospectus disclosure made clear that it won’t be profitable in 2011 – although still running a profit for the first quarter.

I also note that, unlike so many of the tech companies going public during the “IPO Internet Bubble,” this is a company that had a profit last year and that the underwriters and their affiliates did not purchase LinkedIn securities in a pre-IPO private placement or extend a credit facility to the company. Such pre-IPO private placements by the underwriting firms had the effect of enhancing the company’s stockholder’s equity and also adding to the underwriting entity’s risk because the firm was also, directly or indirectly, an investor in the company.

My view is that so long as Wall Street can restrain itself from engaging in pre-IPO investments in the companies they take public and otherwise “fixing” the aftermarket in some new way not already addressed by the SEC’s expansion of the prohibitions of Regulation M to aftermarket trading, the “irrational exuberance” of the public to purchase shares in these kinds of companies will not cause broader economic problems when the trading price falls back to more rational levels in line with the IPO price and the value of the company.

The quality underwriting firms in the “good old days” required at least three years of profits before taking a company public. It would be good if the WSJ tended to indicate disfavor about the secondary market hysteria in acquiring the shares of an IPO company with just one year of profits – in order to inject a voice of reason – and not appear to encourage “Bubble” mentality. The run-up in the aftermarket price is irrational – and maybe at least partially the result of too many ordinary folks having the ability to trade for themselves directly.

Nonetheless, this is a better situation than the ’90s IPO Bubble because if the public wants to overpay for the stock in the secondary market (as noted in this NY Times article today), then each person takes that risk and their individual loss should not have far-reaching consequences because the broker-dealer firms are not taking a position in the company and the secondary market price is not the result of fraud and manipulation.

Broc’s note: I love how Dominic Jones has put together this “story” of how LinkedIn’s IPO played out over social media channels. It’s a brilliant idea to tell the story like that. And I also love Mark Suster’s look at how LinkedIn compares to all the other hot start-ups in Silicon Valley right now.

– Broc Romanek