How the Facebook Fiasco May Escape the Reg FD Noose
- Joshua M Brown
- May 23rd, 2012
I suppose congratulations are in order for Wall Street’s investment banks: There were seventeen individual investors left in the stock market and they’ve just had their throats slit.
Last night, new allegations surfaced about how Facebook execs nonchalantly informed the underwriting banks of a coming revenue slowdown and those banks supposedly engaged in selective dissemination of that news to their biggest clients. Those clients then pulled away from the deal, leading to a rash of canceled orders and a share price that collapsed on Mom & Pop, who’d been lined up around the block for weeks to get their hands on Facebook shares for the debut.
The question arose of whether or not Reg FD might apply in this situation and I decided to take a look.
Regulation FD (Fair Disclosure) came about in the year 2000, coinciding with the boom in online trading and the democratization of stock investing. Prior to the rule, corporate executives were free to hold institutional conference calls excluding the retail public. They were also able to pass on material financial information to their favorite analysts so that earnings estimates could be “white-gloved” up or down depending on how a particular quarter was shaping up. The analysts could then incorporate that intel into their official forecasts or merely pass it on to the biggest clients of the firm to provide them with an information edge (and thus secure more trading commissions).
When the SEC proposed Reg FD, thousands of regular investors wrote in voicing support, the institutional investors fought it tooth and nail. But it passed and has been a part of the landscape these last twelve years.
Now I am (obviously) not a lawyer, but I believe it’s possible that Reg FD may not have been violated here because at the time of the disclosures Facebook was still a private company. Further, it appears that the exemption for companies engaged in a securities offering is even more protective of this kind of activity than many would have suspected…
From IR Web:
Reg FD does not apply to material information disclosed in connection with certain registered securities offerings (public offerings), including information disclosed during the course of a road show or other presentation held in conjunction with such an offering. If an offering is underwritten, the exemption period begins when the company reaches an understanding with its managing underwriter and ends when the underwriter is required to deliver a prospectus or when the securities are sold, whichever is later. If an offering is not underwritten, when the exemption period begins will depend on the type of offering that the company is conducting.
Exceptions to this exemption include certain registered securities offerings that are made on a continuous basis, for example secondary offerings—made on behalf of someone other than the company, such as when a company registers securities for resale after closing a PIPE transaction—or offerings made pursuant to a dividend reinvestment plan, interest reinvestment plan or employee benefit plan.
It’s important to understand that the exemption is limited to material information disclosed in connection with a registered securities offering. For example, if, while conducting a registered securities offering, a company’s CFO discloses material nonpublic information concerning its future financial performance to a group of analysts on a regularly scheduled conference call, that disclosure will not be considered to have been made in connection a registered securities offering just because one is ongoing.
So what went on here, while obviously immoral and unethical if true, may not have been illegal. Besides that, there have only been about a dozen or so enforcement or administrative actions taken based on Reg FD violations over the last decade, and shareholders cannot sue based solely on a violation of the rule anyway.
Wall Street 1, Muppets 0. Same as it ever was.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.