TRUNCATED TRANSPARENCY: The JOB Act’s Compressed IPO Cycle and its Hidden Implications for Market Fairness

April 27, 2012
by Neil Hershberg, Senior Vice President, Global Media/Business Wire
Neil Hershberg

Neil Hershberg, SVP - Global Media

Welcome to the new era of clandestine compliance.

The newly passed JOBS Act (Jumpstart Our Business Startups Act) has come under withering attack by an influential chorus of critics. They are sounding the alarm that the Act dangerously dials back the disclosure obligations of “emerging companies” seeking to go public.

To be clear, we are not talking about mom-and-pop operations here. In Washington’s grandiose way of thinking, “startups” are defined as having revenues of up to $1 billion annually.  In other words, the majority of companies opting to go public will now get up to a five-year exemption from many of today’s more stringent disclosure requirements.

The controversial legislation has drawn fire from leading journalists, including Andrew Ross Sorkin of The New York Times; securities regulators, including SEC Chairman Mary Schapiro; and shareholder advocates, including Barbara Roper of The Consumer Federation of America. The consensus view is that the JOBS Act is a regressive measure that threatens to erode many longstanding investor safeguards. Clever acronyms aside, the JOBS Act is broadly portrayed as weakening the safety net for investors.

The JOBS Act does create new channels for pre-IPOs to communicate with the investment community. However, the Act effectively closes the blinds on the closely monitored IPO pipeline, precluding the ability of investors to delve deeply into the dealings of companies under consideration. Under the new ground rules, prospective IPOs are now protected by a cloak of sanctioned secrecy during the protracted filing period leading up to their public offering.

The result is that clarity has given way to opaqueness. IPOs are now able to engage in confidential discussions with the SEC about their plans to tap the capital markets, until 21 days before the IR Road Show cavalcade begins.

Critical corporate information that was previously made available to investors months in advance — including financials and insights into the company’s organizational structure — can now be legitimately withheld from public scrutiny until three weeks before the investor marketing process gets underway.

What this means in practice is that investors essentially have about a month or so to evaluate the financial viability of a company preening to go public; previously, interested investors had a minimum of several months to do their due diligence.

There also is a more subtle side effect to today’s cloistered IPO process, one that further distorts the dynamics of a fair and competitive marketplace.

The SEC approved a rule change last December that allows NASDAQ to offer “free” corporate IR services, e.g. press release distribution and IR Web hosting, to IPOs and companies that transfer their listings from the NYSE.

Coincidentally, all these corporate services are provided by NASDAQ’s wholly owned subsidiaries, thwarting competition. The ability of NASDAQ to bundle IR services with its listing fees effectively elbows other service providers — many with superior, more advanced product offerings — out of the equation.

The agency’s approval came despite what we believe was a preponderance of evidence that the practice was anti-competitive. Ironically, SEC Chairman Schapiro was recently called to testify before a Congressional committee looking into the agency’s lack of economic analysis in its rule-making process. Clearly, the SEC should have done a lot more home work before rendering a decision in favor of NASDAQ’s rule change.

For all its political promise and good intentions, the JOBS Act has made a bad situation worse. Any pretense of market fairness during the IPO birthing process has now lost all credibility.

Today’s closed environment allowing IPOs to silently snake their way through the filing process has reinforced NASDAQ’s unfair competitive advantage, eliminating any premise of meaningful competition. Not only does NASDAQ have the inside track, but the track itself is now largely hidden from public view.

In perhaps the cruelest irony, the JOBS Act may result in the ultimate unintended consequence: potentially destroying jobs in a robust industry that has long thrived based on a model of fair and open competition.


The European Commission’s Stealth Decision on Transparency:

November 9, 2011
For publicly listed companies, transparency is not an option — it is an obligation.
by Neil Hershberg, Senior Vice President, Global Media

Neil HershbergThe European Commission said as much when it implemented its harmonized pan-European disclosure standards for the 27-member European Union in January 2007. The compliance guidelines were aptly titled:  the Transparency Obligations Directive ["TOD"].

Therefore, the European Commission’s puzzling proposal to make interim management statements and quarterly reports voluntary for all EU issuers is beyond baffling. And given the global market machinations attributable to the roiling European debt crisis, the timing of the Commission’s diffused disclosure requirements couldn’t be worse.

Perhaps most upsetting of all, the Commission’s decision to truncate its transparency criteria for all EU issuers was apparently arrived at in a stealth manner.

In the way of background, the European Commission held public consultations on its plans to “modernize” the four-year-old TOD in the spring of 2010.

A key focal point of the discussions was the desire by SMEs (small and medium-sized enterprises) for relief from “the administrative burden” associated with trading on regulated markets.

Large-cap companies quickly capitalized on the opportunity,  arguing that they too were overwhelmed by the statutory requirements and lobbied to be similarly exempt from quarterly financial filings.

Most market observers dismissed the outcry by large-cap companies as simply an attempt to latch on to a market reform movement that was gaining momentum. Few, however, believed that large-cap companies would be included in any revamped reporting requirements.

Some 16 months after the original consultation period, and without any further debate or notice of its intentions, the European Commission announced its surprise retrenchment proposal, abolishing the requirement that public companies publish quarterly financial information.

The Commission did the unthinkable, effectively waiving the need for all listed companies, regardless of size, to issue quarterly reports. Under the revised landscape, companies are only obligated to file half-year and annual results.

In retrospect, the Commission took the easy way out. Faced with the challenge of identifying qualifying SMEs, particularly with fluctuating market valuations, was too daunting a task. The Commission decided to take the path of least resistance: throw out the transparency thresholds for all issuers in the name of cost-efficiency.

The reality of the situation is that cost of regulatory compliance is extremely reasonable, especially when weighed against its capital market benefits. These include greater visibility and liquidity, less volatility, and higher trading volumes, all of which are likely to contribute to a lower cost of capital.

Services such as Business Wire offer flat rate annual packages that are very competitively priced, enabling issuers to effectively control costs, while ensuring broad, simultaneous distribution to the full range of market participants.

Under the Commission’s proposal, companies can still file quarterly reports and interim management statements at their own discretion. There is no longer a mandate for companies to do so. The investment community, and the financial markets, will be ill-served by the Commission’s short-sighted decision.

Ironically, many observers think that the majority of companies will continue to update the marketplace on a regular basis. Most companies recognize that to limit market communication to semi-annual updates simply doesn’t make sense. The value of an effective investor relations program that, by definition, includes regular updates on corporate developments, has been well documented by independent academic studies.

So while many market professionals anticipate minimal consequences from the Commission’s decision, it clearly sends the wrong message to the marketplace.

The global markets remain as fragile as ever, with investor confidence teetering as the world holds its breath waiting to see how the European debt crisis plays itself out.

A major lesson learned from the 2008 financial markets meltdown has unfortunately been quickly forgotten by some market regulators.

Information is the lifeblood of our financial markets. Stanching its flow, in the name of relieving the “administrative burden” on listed companies, is a tremendous disservice to the investment community, and needlessly substitutes risk for reassurance.

With the European Union seemingly on the brink, the European Commission’s proposal to dial back on disclosure sets a dangerous precedent that desperately needs to be reversed.


Inadequate Disclosure: The Truth About Transparency

May 3, 2010

– by Neil Hershberg, Senior Vice President – Global Media, Business Wire

It is the hidden paradox of the regulatory reform debate dominating today’s headlines. While improved disclosure and transparency are widely seen as the ‘silver bullets’ to remedy Wall Street’s worst abuses, the integrity of the disclosure process itself is under attack.  And individual investors are once again in danger of bearing the brunt of the damaging fallout.

For all the current talk among reformers, regulators and journalists touting the need for better disclosure and transparency, there is an inconvenient truth that is being ignored. Hardly anyone has bothered to “look under the hood,” specifically to examine the engine that drives the disclosure process. It is deliberately being throttled, resulting in ‘inadequate disclosure,” and having the reverse impact of what the reform movement is seeking to accomplish. Today’s transparency challenge could very well lead to tomorrow’s financial crisis.

Equal and Unrestricted Access to Market-Moving News

Disclosure has traditionally been defined as providing material information to ALL market participants, simultaneously and in real-time. The ideal is that all investors have equal and unrestricted access to market-moving news that may influence their investment decisions. The SEC, under Arthur Levitt, got it right when it published Regulation Fair Disclosure in 2000, formalizing the egalitarian concept of a ‘level playing field.’

By most accounts, Reg FD as originally conceived worked reasonably well, correcting certain practices that had favored Wall Street professionals, often at the expense of the average investor.

Unfortunately, the SEC didn’t leave well enough alone. It tinkered with Reg FD during the Christopher Cox regime, coming up with a solution for a problem that didn’t exist.

Interpreting the SEC Interpretive Guidance

The agency issued its Interpretive Guidance Release on Web-based Disclosure in 2008, and it quickly proved to be the modern-day equivalent of a Rorschach test for investor relations professionals. The SEC’s guidance left much to the imagination, and that is the crux of the problem. Nearly two years later, IR professionals are still trying to figure out what it all means.

Rather than providing clarity as to the appropriate use of technology in investor relations, the SEC’s guidance offered ambivalent guidelines and imprecise circumstances that created unnecessary uncertainty in the marketplace.

The true intent of the SEC’s guidance was to encourage companies to make more information available to the marketplace, by posting ‘supplemental’ news to their corporate web sites, information that may not have warranted a news release. Unfortunately, the message never resonated with the IR community, which failed to appreciate that the SEC’s guidance was simply meant to augment their communication initiatives.

The agency’s indecisive guidelines have led to predictable results, and unintended consequences. Whenever there is a perceived policy void, opportunistic individuals will seek to step in and fill the breach. Many self-anointed experts have aggressively advanced their own interpretations of the SEC’s intent, which coincidentally coincide with their own commercial interests.

Inadequate Disclosure

More ominously, however, a handful of companies have tested the waters by deliberately limiting the information that is broadly disseminated to investors. Several companies have published “notice-and-access” releases, which are brief announcements that direct investors to full-text postings on corporate websites.

Based on the sharply critical response, no one has confused “notice-and-access” with “best practices.”  The decision continues to be unpopular among journalists and investor advocates. Obviously, no one wants to play “Where’s Waldo?” during earnings season, or go scrambling for information in today’s millisecond trading environment.

The equation is clear:  “Notice-and-Access”= Inadequate Disclosure.  No advanced calculus required here; it’s Logic 101.

Here’s a checklist of critical shortcomings:

  • Simultaneous?  No.
  • Easy and equivalent access for all investors. No.
  • Archived permanently in leading databases? No.
  • A definitive audit trail for regulatory and legal review? No.
  • Protection against future insider-trading allegations? According to authoritative legal experts, no.
  • In synch with the SEC’s intent to consolidate financials in a universal programming format [XBRL]?  No.
  • Worth the risk for the modest cost-savings involved? Definitely not.

Best-Practice Disclosure Mosaic

The bottom line is that disclosure is a mosaic of distribution channels; all platforms that encourage investor outreach  — traditional, web-based, and social media — should be embraced as part of an integrated and comprehensive IR strategy. The use of Business Wire ensures simultaneous, secure and real-time delivery of price-sensitive information to ALL market participants. Corporate web sites, RSS feeds, and other emerging technologies can, and should, play an important complementary role in reaching investors.

Business Wire is a strong proponent of orderly and efficient capital markets; we are justly proud of the critical infomediary role that we play in the process. Of equal importance, we pride ourselves on the outstanding value proposition that we provide our clients, which continues to expand with the addition of new mobile applications, SEO platforms, and enhanced metrics that quantifies our return on investment.

The cost of our service is fair; the value we provide could be described as extraordinary. And when all the different expense elements that public companies pay annually to meet their listing requirements and disclosure obligations are considered, Business Wire clearly ranks as one of the least expensive charges among all compliance expenditures.

Better disclosure and transparency may well be the answer to the problems that have plagued our financial system. We ask that if improved disclosure and transparency requirements are indeed part of the financial reform package that is ultimately enacted, that the integrity of the disclosure process is upheld, and that the interests of ALL investors are protected.


Less Transparency = Less $$$?

April 12, 2010

We’ve written a lot at Business Wired on the subjects of disclosure and transparency, including the causal relationship between increased communication and capital market benefits.  Looks like there’s even more evidence for transparency being good for companies’ bottom lines — and for lack of transparency hurting them:

After 11 years of publishing a list of the best corporate citizens, Corporate Responsibility Magazine plans to introduce in its April-May issue, out this week, its first-ever “black list” of the worst companies, or those that are the least transparent.

Transparency, as the magazine defines it, means making information about practices like employee benefits, climate-change policies or philanthropic efforts publicly available.

Dirk Olin, editor in chief of Corporate Responsibility Magazine, notes that, when compiling data for the article, they were able to find 30 corporations with no relevant data at all on those topics available publicly.  That group includes such corporations as clothing retailer Abercrombie & Fitch and weight loss specialists Weight Watchers.

And what does that mean for shareholders of those companies?

The best corporate citizens list . . . had a total return on shareholder value of 2.37 percent over three years. But the 30 worst had a negative 7.38 percent return.

“Our aggregate analyses,” Mr. Olin said, “make a strong argument for the business case for transparency.”

Corporate Responsibility’s full “Black List” will be published next Wednesday, April 24.


Web-Based Disclosure Still Not Ready for Prime Time

July 29, 2009

The one-year anniversary of the SEC’s Interpretive Guidance Release on web-based disclosure will likely pass unnoticed this weekend– and for good reason. In the eyes of most market participants, it has proven to be a non-event that has gained little traction among issuers reluctant to tinker with a proven and effective disclosure system that works exceptionally well.

In retrospect, there are several reasons why the SEC’s Guidance Release failed to become the landmark event that its supporters had hoped for:

  • Within weeks of its issuance, the global financial system was in danger of imploding, diverting the attention of the media, the investment community, and other key audiences. As the markets teetered, most constituents were oblivious to the change — and a good many continue to be unaware of its potential implications to this day.
  • The fact that web-based disclosure was a pet project of former SEC Chairman Christopher Cox, vilified by some observers in the wake of the financial crisis, wasn’t a selling point either.
  • At the end of the day, however, the major reason why the SEC’s Guidance Release has had marginal impact is simple: The financial marketplace recognized its very real shortcomings. In the process, investors have tacitly reaffirmed a proven regulatory disclosure model that has emerged as the global gold standard.

The orderly flow of price-sensitive information to all market participants — available simultaneously, in real time, and without restrictions, to institutional and individual investors alike — was judged to be too important to be left to chance.  RSS feeds, corporate blogs and standalone web postings are no substitute for the broad-based distribution of a news release via a secure multi-channel distribution platform.

The SEC’s Guidance Release purposely lacked clarity and definition; the variables to meet compliance standards ultimately proved far too vague to justify the risks.

Furthermore, we see constant reminders of why credible information channels are so important. Just this past weekend, Reuters rejected a faxed release originating from the Middle East about a purported takeover that was later exposed as being fraudulent. The editor on duty immediately questioned why a release of this magnitude wasn’t transmitted via a recognized commercial news wire such as Business Wire — and he correctly decided not to run the story.

There is a lot more to the disclosure process than simple “information access.”  Authenticating the source, editorial review, and secure networks all contribute to the effective functioning of the global financial markets. We’ve spent nearly a half-century earning our stripes as a reliable, credible news source, which is more important than ever as governments grapple to restore financial stability and transparency.

We certainly don’t want to seem dismissive of the SEC’s Interpretive Guidance Release. In the final analysis, it cast a much-needed spotlight on important new technology tools that help to expand  investor outreach.

We stated from the outset that corporate web sites, blogs and RSS feeds are indeed valuable adjuncts that can help get the corporate message out. We are certainly huge proponents of technology and, in fact, use many of these complementary tools to augment our patented news delivery network.

It is reassuring to note that once the initial hoopla surrounding the SEC’s Guidance Release died down, reason ultimately prevailed. Slowly emerging is a hybrid approach that retains the broad-based disclosure model at its core, while also including the ancillary communications channels cited in the agency’s position paper.

We’ve seen this evolution before — our own distribution network went from telephone lines, to satellite systems, to Internet protocol. Along the way, we folded in fax, e-mail, RSS feeds, blogs, IR web sites, and any other communication tool that will increase “full and fair” disclosure.

The real winner now that the dust has finally settled: Investors who are enjoying the best of all possible worlds.

– Neil Hershberg, Senior Vice President, Global Media for Business Wire


Cathy Baron Tamraz Discusses Disclosure and Transparency

April 30, 2009

Cathy Baron Tamraz, Business Wire President & CEO, discusses the challenges facing Treasury Secretary Timothy tamraz_cathy_baronGeithner regarding maintaining and increasing transparency in the financial markets in a new commentary at FinReg21.

Tamraz’s recommendations, combined with new SEC chief Mary Schapiro’s “visceral reaction” to the idea of web-based disclosure in which market participants have to go looking for financial information, are good news for the markets and for investors.  Tamraz talks about the press release as a disclosure vehicle, and how the existing framework for news distribution is already in place to help Sec. Geithner reassess the state of disclosure and help avoid future financial crises.

Go read, and let us know what you think in the comments below.


Dominic: “We’re Just Not That Into You”

February 6, 2009

While we are not in the habit of engaging in discourse with the blogging equivalent of someone standing in the middle of Park Avenue screaming at the top of his lungs that the world will end unless we sinners repent, it is amusing to us that Mr. Dominic Jones seems to become more and more unhinged as we, as is our right, continually highlight and crystallize the many valid benefits of disclosure via our simultaneous news distribution platform.

Everyone is entitled to their opinion, and we would be happy to engage in a serious, reality based dialogue with anyone who wishes to discuss the case for website disclosure.  We’ve done so numerous times, in a highly appropriate and professional manner, with the likes of the SEC, the New York Stock Exchange and Sun Microsystems. Though we may not always agree, we all still respect each other.

However, let us be clear that we will not, from this point forward, get ourselves involved in any conversations, online or otherwise, with any self-styled disclosure evangelists who appear unable to have a reasoned, mature, philosophical discussion about a topic on which we disagree, having instead to resort to childish tantrums of name-calling (surprised we haven’t seen “liar, liar pants on fire” from him yet) and even resorting to characterizing highly respected members of the financial media who do not share his opinions as “pimps”.  We choose not to muck around in that mud.

So let us conclude by saying we believe in the value, validity and integrity of our business, and would gladly continue to go into great detail about that with anyone who wishes to hold a reasoned, adult conversation on the topic.  And if, in the end, we cannot convince you of our convictions, we promise not to call you a liar.

Gregg A. Castano, Co-Chief Operating Officer, Business Wire


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