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As I officially enter my thirtieth year of practicing securities law, I think it is only natural to look back and reflect on some the lessons that I have learned over the years. Also, as we slog through the dog days of summer, new developments in the world of securities law and corporate governance are few and far between, forcing your intrepid blogger to dig deep for content. So today I launch my mini-series of blogs on some of my top lessons learned.

I begin with some of my formative experiences as a newly minted lawyer working in Corp Fin at the SEC, where I had the benefit of some great mentors who literally taught me everything I needed to know about the securities laws, as well as how to practice law in a regulatory environment. The time was the last half of the 1990s, and there was a little something called the Internet that was changing just about everything, and spawning and extraordinary IPO boom as innovative companies seemed to be born every day and shortly thereafter go public. As an examiner reviewing IPO filings in Corp Fin, I found myself on the front lines of an enormous market bubble that spectacularly burst soon after I left the SEC. Reviewing all of those Form S-1 registration statements definitely brought about a few lessons learned:

1. Be Skeptical, But Open-Minded: I distinctly recall sitting in the office looking at all of the Form S-1s that were being filed and being very skeptical (along with my colleagues) of the freshly-minted business that were seeking to go public. When the Form S-1 for Amazon.com was filed, we wondered aloud why anyone would buy books using the Internet when they could go to their local bookstore or Barnes & Noble. When the Form S-1 for eBay was filed, we scoffed that it seemed unlikely people would be excited about buying used Pez dispensers through an Internet-based auction. When the Form S-1 for Yahoo! was filed, we just scratched our heads. While there were certainly both winners and losers in that timeframe, I had a good lesson in being open to the possibility of new business ideas and ways of doing things, while maintaining a healthy degree of skepticism to ask the tough questions and seek the best disclosure for investors so they could make an informed investment decision.

2. Don’t Overdo It: If you can imagine, back in those days of that late 1990s Internet boom it was not uncommon to send an initial comment letter on a Form S-1 that had over 150 comments. In retrospect, that seems like an extreme result, and if I had it to do all over again, I would likely be more circumspect in the comments that I would raise. All of the commenting tended to drag out the process, but I would say that they approach undoubtedly elicited better disclosure and more accurate financial statements. With the benefit of perspective, I am not sure how much incrementally better the disclosure was as compared to the effort of dealing with all of those comments.

3. Communications Matter: There once was a time when Section 5 of the Securities Act was sacrosanct and gun-jumping was an issue that the Staff of Corp Fin was very concerned about, because the whole point of the Securities Act registration provisions is to channel the communications about the offering into a prospectus that includes the material information about the company and the offering, so that investors can make an informed investment decision. As a result, ginning up interest in an IPO through news articles and other extraneous communications is problematic because investors do not get the full picture that way. I got to defend the ramparts of Section 5 with a 1999 offering by a company called Webvan, which no one remembers today but was a once a highly anticipated IPO of a business delivering groceries ordered on the Internet. A Forbes article ran during the IPO that had some wild claims by the CEO, and the Staff came down hard on the gun-jumping violation, forcing a delay of the IPO to facilitate a cooling-off period following the media hype. Of course the IPO went on to be a big success but the company was bankrupt within a few years – a little bit of healthy skepticism might have gone a long way with that one!

4. Stick to the Fundamentals: One of the challenges faced during the 1990s Internet IPO boom was that many of the companies going public had not been in existence for very long and had not generated profits or revenues that would typically be used to determine their value, so they turned to a wide range of alternative measures outside of the financial statements as a means for describing their market opportunity. This trend presented a considerable challenge to the Corp Fin Staff, because there was no real framework in the SEC’s rules for dealing with disclosure about the number of “clicks” or “eyeballs” that a company cited as proof of concept. The experience really emphasized for me that there is really no substitute for the information provided in financial statements and MD&A for getting a true picture of the fundamentals of a company for the purpose of making an investment decision.

5. What Goes Up Must Come Down: We all know how the 1990s Internet boom ended up – with a pretty spectacular bust that resulted in quite a few companies with good ideas going out of business or never realizing their full potential due to a lack of access to capital. In looking back today, it seems to me that the overall frenzy that fueled the bubble was just unnecessary – we would all have been better off if those companies has spent more time in gestation and had not flocked to the public markets before they were ready. Investors ended up losing a lot of money just because the market collectively suspended belief for a few years and was willing to let too many companies go public before it was their time. I think this is definitely a lesson learned that we should keep in mind today

– Dave Lynn