According to a post this week on SFGate, several companies, including LinkedIn, Demand Media, and Groupon, made pre-IPO profitability claims that turned out to be not quite as bright as the companies reported before they went public -- and hence became subject to financial reporting regulations.
This illustrates a clear problem with the current pre-IPO rules -- one which the SFGate post points out is even more troubling in light of proposed legislation to actually loosen restrictions on companies seeking pre-IPO dollars. The proposed measures include raising the maximum number of non-employee investors from 500 to 2,000 before going public and allowing more crowd-sourced funding.
It's widely known that there is a grey market for pre-IPO stock. In fact, I wrote about this issue back in January, when Facebook was reportedly being valued at $50 billion by Goldman Sachs.
I complained in that post about the danger of this approach, mostly because you have a grey stock market complete with investment bankers, yet no government oversight. What’s more, these companies and the investment banks selling this stock are free to make all kinds of claims without anyone checking the books to see if they're true, and unfortunately, the veil doesn't come off until the company is public.
And honestly, what's the incentive for them to be completely truthful? The more they embellish the financial picture, the higher the price goes.
The trouble with the grey market and the proposals before Congress to reduce restrictions further is that they make the stock-buying process more of a hit-or-miss proposition than it needs to be, and when the books open, it's, “Mea culpa; turns out we weren't quite as profitable as we thought.” But this isn't an intelligent way to set market value.
Of course, nobody is forcing anybody to buy anything. But who doesn't want to be in on the ground floor of the next big thing before it takes off? Still, if you're making that bet on bad information, it's putting lots of money into these companies' pockets -- and providing little recourse when the truth finally comes out.
I understand that the government is trying to loosen restrictions that hold back small companies from growing more quickly and adding more jobs to an economy desperately in need of them, but I think the powers that be need to be careful how they tread here.
Letting companies buy and sell stock before they are public to raise funds for their employees is risky enough in my view, but reducing restrictions on investments in pre-IPO companies only puts a bigger burden of risk on investors -- all outside the view of government watchdogs.
It seems to me that, in this instance, we need more oversight, not less. We've seen that, when left to their own devices, these companies are going to exaggerate to increase the value of their organizations.
If we truly want truth in investing, and we absolutely should, we don't want to make it easier for companies to continue to do that.
— Ron Miller is a freelance technology journalist, blogger, FierceContentManagement editor, and contributing editor at EContent magazine.
Well, there will always be an incentive to blow up the companies numbers in order to capture investor's eyes (and pockets) but there most be some penalties the SEC can impose to companies that go public and lie about the numbers they had when they were private.
Record companies is a good comparison. Look at some the hopeless bands which were signed by labels which had missed the Beatles. It happened all over again with the Sex Pistols.
People with the funds are surprisingly willing to place countless improbable bets, just on the remote chance that they'll stumble across the next Facebook. I think there's been some serious psychological research showing that many people are much more enthusiastic about betting on highly improbable large returns than on quite likely small returns.
I have another issue with that whole scene also. The inflated expectations these kids have going into this thing, the unrealistic pressures they are going to face, and the crushing disapointments they are not prepared and steeled for. In a way the VC scene is worse then the record companies were when they were trying to manufacture "hits" and "stars". One out of ten releases might get some action, if even that, and your out the door along with your dreams if nothing happens.
Excellent input, Dream Chaser. And to this I'd add that not only are investors throwing too much at early stage startups, they're throwing it at startups with frivolous or gimmicky propositions that aren't going to contribute all that much to the future of the Internet or its users.
On a related note I see what Parker sees ( gasp! ) . . .
At yesterdays Techonomy conference Sean Parker commented on the explosion of seed-stage startups. “Little startups are ridiculously overfunded, the market is ridiculously overcrowded with early stage investors. A lot of these early-stage investors will fund, literally, anything.”
“Too many angel investors are throwing way too much money–albeit in little drips–at aspiring entrepreneurs who aren’t up to the task of building a company.”
“The conditions in Silicon Valley now resemble the conditions preceding World War One,” he said. “It’s kind of hard to decipher who’s working with whom and who’s at war with whom.”
The Wall Street execs and minions of lawyers will forever make sure there's an advantage given to them over the public. Laws and regulations are made by lawyers at the bequest of those in command.
Isn't this what "Occupy" is really about? The powerful grabbing advantages over the less powerful.
As I understand it, once they prepare to go public, companies have to file papers and give the government and investors an accurate picture of the fianancial condition of the company, but before they do that the process is opaque. By proposing a law that would allow 2000 non-employee investors (up from the current 500) to invest in the company prior to having to go public, it would allow the company to continue to operate with little public scrutiny and that's what concerns me.
I'm just a humble blogger, and not an expert on the intricacies of finance by any means, but private companies are not subject to the same rules as publicly traded ones and these laws would allow more investment before an IPO without the scrutiny investors have once a company goes public (or even prepares to)
Is there any public auditing to make sure that the papers are truthful? Another thing is how much percentage of shares the owner or trust can hold, at the time of offering IPO’s.
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Recently, the Obama administration has been of two minds where privacy rights are concerned. On one hand, you have an administration that vowed to veto CISPA and mandated open data for government websites. On the other hand, you have an increasingly out-of-control Department of Justice on a fishing expedition at AP and demanding legislation to let the FBI wiretap private, encrypted communications and levy fines if a company fails to comply.
These days, even some usually techno-friendly people have their hackles up about the potential of Google Glass to surreptitiously record video or take pictures. I've heard more than one tech savvy friend bring up "the creep factor," the ability of a weird guy to secretly record you.
Last year as you may recall, the Internet community rallied and prevented the passage of SOPA/PIPA legislation. CISPA, another piece of legislation that targeted Internet freedom, also died. However, one proposed law that failed in 2012 has been revived this year. And it appears forces are not now lining up against CISPA with the same enthusiasm as last time.
You might be surprised to learn that the FBI has generated hundreds of thousands of secret information requests since 2000, many of which go to Internet companies seeking information about individual users. You may be even more surprised to discover that in all those years, only one Internet company has challenged these secret requests.
Late Friday I learned I had been chosen to participate in the Google Glass Explorer's program, a group selected to take the first-generation of Google Glass out in the world and report back on how they're using the devices.
How do you recognize an Internet bubble when you see one? Saunders explains how all bubbles have four symptoms in common – and takes a swipe at Google and Twitter into the bargain.
New York's Metropolitan Transit Authority is conducting a pilot test of digital kiosks to guide subway users to where they want to go more efficiently and at lower cost.
Yahoo's new CEO can't go back to what Yahoo was; that's how it got to what it is! Instead she has to look at something that Yahoo has always rejected, which is a relationship with the telcos and cablecos. They'd love a partner in creating service applications.
There's a lot of debate on whether ceding control of the Internet to the ITU/UN is bad for the Internet. Whether that's really true depends on just how much of the "control" we yield and what we do to balance the Internet as an innovation platform and as a service platform.
The plan for unmanned police drones to patrol traffic and other city conditions in Seattle has sparked a new set of legal concerns about privacy. Law traditionally lags technology, but we can expect now to see a new round of activity in the courts as legal definitions begin to emerge on what "next-gen privacy" will look like.
New York's Metropolitan Transit Authority is conducting a pilot test of digital kiosks to guide subway users to where they want to go more efficiently and at lower cost.
The whole Amazon.reader debate is a double-stupid. It's stupid to think that there's any e-book buyer who doesn't know Amazon's URL, and it was stupider to let ICANN launch the whole free-form TLD initiative to start with.
While NFC's original goal was to enhance mobile commerce applications, it is finding its way into a number of other uses, which is creating both opportunity as well as challenges for IT departments.
Enterprises would like to move to cloud computing but are hesitant because they are concerned about providers’ ability to secure company data. Here are some tips that help to ensure that if breaches occur, the business is not left holding the bag.
Edmunds separates customers into segments based on the info it collects on its site and from partners, and uses that to push out custom content, said Brian Baron, director of business analytics for Edmunds.com, at Predictive Analytics Innovation Summit.
The automotive website uses propensity modeling to target ads and customer registration forms, said Brian Baron, director of business analytics for Edmunds.com, at Predictive Analytics Innovation Summit.
Ushering in a new era of cognitive computing systems, IBM announced today the IBM Watson Engagement Advisor, a technology breakthrough that allows brands to crunch big data in record time to transform the way they engage clients in key functions such as customer service, marketing, and sales.
Expert Integrated Systems: Changing the Experience & Economics of IT In this e-book, we take an in-depth look at these expert integrated systems -- what they are, how they work, and how they have the potential to help CIOs achieve dramatic savings while restoring IT's role as business innovator. READ THIS eBOOK
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