February 27, 2018

“Testing the Waters”: Everybody into the Pool?

SEC Chair Jay Clayton has made invigorating the sluggish IPO market one of his top priorities.  So far, the SEC’s most high-profile action on this front during his tenure has been to permit all companies – not just emerging growth companies – to make confidential filings of draft IPO registration statements.

Now, this WSJ article says that the SEC may take another step, and allow all companies, regardless of size, to “test the waters” before filing an IPO registration statement.  The ability to “test the waters” was provided to EGCs as part of the JOBS Act – and this excerpt from Cydney Posner’s recent blog provides an overview of what it allows companies to do:

The testing the waters provisions in the JOBS Act significantly relaxed “gun-jumping” restrictions by permitting an EGC, and any person acting on its behalf, to engage in pre-filing communications with qualified institutional buyers and institutional accredited investors. This relaxation of the gun-jumping rules allows companies to reduce risk by gauging in advance investor interest in a potential offering.

Prior to the JOBS Act, only WKSIs could engage in similar testing-the-waters communications. “Test-the-waters” communications can be oral or written, made before or after filing a registration statement, in connection with an IPO or any other registered offering.However, the only permitted communications are those made to determine whether the specified investors might have an interest in a contemplated securities offering.

As Broc blogged at the time, allowing all companies to “test the waters” was one of a slew of recommendations aimed at improving the capital markets made by the Treasury Department last October – and you may want to check out that list for other potential “coming attractions.”

Here’s an article from MarketWatch’s Francine McKenna with more background on the SEC’s efforts to make life a little easier for IPO candidates.

Warren Buffett’s Annual Letter to Shareholders

A few days ago, Warren Buffett released his annual letter to shareholders. As usual, this went completely unnoticed by the financial press – barely 50,000 articles & blogs have been written on it to date – so I’m sure you’re hearing about this for the first time from me.  There’s no need to thank me, it’s just part of the job.

Anyway, here’s a selection of some of the media reports on the Oracle of Omaha’s latest epistle:

– CNBC’s “Highlights from Warren Buffett’s Annual Letter”
– Bloomberg’s “Lessons from the Oracle: Warren Buffett’s Shareholders Letter, Annotated”
– MarketWatch’s “7 Highlights from Warren Buffett’s Berkshire Hathaway Investor Letter”
– NYT’s “Buffett’s Annual Letter: Berkshire Records $29 Billion Gain from Tax Law”
– Fortune’s “Buffett Warns That Safe-Looking Bonds Can be Risky”

Stock Buybacks: Here Comes the Backlash?

Warren Buffett’s recent pronouncements aren’t limited to his annual letter.  Berkshire Hathaway’s sitting on a pile of cash – $116 billion to be specific.  Yesterday, Buffett told CNBC that Berkshire-Hathaway was more inclined to repurchase stock with its excess cash than to pay dividends.

He’s got a lot of company. Stock buybacks have long been corporate America’s favorite bit of financial engineering – and this ValueWalk article says that 2018 could be the biggest year for them ever. But despite their continuing popularity, criticism of buybacks appears to be on the rise. For instance, this Bloomberg article says that buybacks are a big contributor to the market’s recent volatility. Here’s an excerpt:

Some market watchers are adding corporate share repurchases to the list of reasons for last week’s turmoil, which already included rising interest rates, higher inflation, growing government debt, volatility-linked investment funds and Washington instability. More significantly, those pointing the finger at buybacks say continued corporate stock purchases — which, unlike some of those volatility funds, survived the brief market downturn — will make the next one far worse.

Regardless of their impact on the market, the optics of buybacks are increasingly bad – this Washington Post op-ed claims that when it comes to using the additional cash flowing in from tax reform, companies are planning to spend 30x as much on buybacks as on wage increases.

John Jenkins