7 ms·

I guess this was inevitable since they started allowing listing by reverse takeover but still... <Countdown to a massive fraud begins> Edit: Drocer88 correctly

I guess this was inevitable since they started allowing listing by reverse takeover but still... <Countdown to a massive fraud begins> Edit: Drocer88 correctly points out below that reverse takeovers have always been legal!

toomuchtodo 6y ago
Are investment banks truly working that hard to prevent fraud for the inflated fees (~5%) they're charging? The SEC still has a government funded securities regulator role to play. If net benefit increases, we should celebrate when middlemen are disintermediated. If there's evidence this causes harm to non-accredited investors (any investors of significant amount really), we can strengthen regulator resources (and for likely a lower cost than continuing to shovel money to IBs for these deals).
- colechristensen 6y ago
  There’s a difference between a regulator and someone with a financial interest in success. There is a certain effectiveness for some kinds of problems that being financially interested in truth brings which is harder to do consistently with regulation. I am not trying to suggest a specific course is better, but pointing out that there is value in aligning doing the right thing with profit motive.
  - SmellTheGlove 6y ago
    Sure, and I don't think that with this plan, there's anything stopping investment banks from agreeing to purchase direct listed shares at IPO in an arms-length transaction. Given the need to file audited financials, among other components of the regulatory burden to go public, is the investment bank charging a fee to act as a fiduciary really adding much protection?
    - colechristensen 6y ago
      There can be a sizable gap between complying with regulations to ensure X and trying to do X. lock picking lawyer had a great video on that topic recently https://youtu.be/DykUXXcJGIw https://youtu.be/DykUXXcJGIw Writing regulations is hard to achieve the intended effect. Complying with regulators frequently involves a mindset of checking boxes instead of trying to accomplish something. If, however, an investment bank essentially buys a large chunk of your company, if only temporarily, they have a real motivation to figure out if it is legitimate, and there are real consequences if you screw up, not just legislated consequences but real financial bag holding ones. You have to think of the everything-is-a-game mindset to help you evaluate situations. The game of being a regulator is different than the game of being an investor. There is value in both.
      - SmellTheGlove 6y ago
        > If, however, an investment bank essentially buys a large chunk of your company, if only temporarily, they have a real motivation to figure out if it is legitimate, and there are real consequences if you screw up, not just legislated consequences but real financial bag holding ones. Right, but what I'm saying here is, a bank can still choose to be an arms-length investor. My hypothesis is the market gets as much positive signal from that as it would a traditional underwriting syndicate, without the upside bleed-off. > You have to think of the everything-is-a-game mindset to help you evaluate situations. The game of being a regulator is different than the game of being an investor. There is value in both. I'm not conflating the two. I'm suggesting the investor signal doesn't require a traditional underwriting syndicate. Phrased another way, how many IPOs have canceled due to a failure to form an underwriting syndicate, or because of the due diligence performed by the same? WeWork comes to mind, but I don't think we needed the bank to tell us it was problematic - reading the S-1 would have been sufficient.
- LatteLazy 6y ago
  I won't pretend I know. That said, the main advantage to these middle men is that they agree to buy and hold (directly and for select clients) shares at IPO. That means they have skin in the game and if the price falls at IPO or soon after, they're burnt. So I guess they're doing at least some due diligence. Too often regulators only come in (decades) after frauds started (Enron, WorldCom, Wirecard). And frauds fall through cracks between regulators too as it isn't clear who is responsible for what. I'd actually like to see more of this sort of role elsewhere in finance: having your accounts signed off by a big 4 firm would mean a lot more if they had to payout in the case of fraud. But that's a somewhat different issue I just thought I'd add...
  - cinntaile 6y ago
    Regarding your first paragraph about directly owning shares for themselves and for clients. That means they are also incentivized to underprice the shares so that they can make a bigger profit. They get to buy in at a lower price and sell at a higher one.
    - LatteLazy 6y ago
      Yes, that's correct. This is why the vast majority of IPOing shares RISE in price early on. Partly this is countered by the competition between banks, if Morgan Stanley tell you they can IPO you at 50usd but Jefferies say 55usd, you go with Jefferies. It's also good news for anyone who continues to hold equity (CEOs, founders, early/angle investors etc). Only the initial equity sold goes at this discount. For this reason many companies will start by offering small amounts of equity and later issuing more at the market price. Of course, its also a very hard question to answer: how much is a share of company X worth? When there is no market to reference. So the discount is also a risk premium both for fraud and for mis-valuation. I actually think IPOs are one of the hardest parts of finance to fully understand and to do and so are one of the most interesting. That's not to say that there aren't conflicts of interest and dodgy activity. Just that there are 101 moving parts.
      - cinntaile 6y ago
- drcode 6y ago
  My impression is their fees are closer to 50%: Somehow, only close friends of the investment banks are allowed to buy shares at the listing price, the rest of us have to wait until after the 2x price pop in the markets... at least that's what has been happening in most recent IPOs.
  - smabie 6y ago
    why do owners of pre-IPO shares care? When people talk about investment banks ripping companies with regards to the IPOs, they're not talking about the public. Moreover, most retail investors aren't going to participate in the pre-market auction in the first place, so the results will be the same
    - drcode 6y ago
      There shouldn't be a pre-ipo auction, the stock market should be the auction. That's what the SEC is enabling here. This is good for the companies and good for the retail investors, bad for the middlemen.
    - rocqua 6y ago
      If a company has 1000 shares outstanding, and 2000$ in assets, and it sells another 1000 shares for 1$ a pop, then the owners of pre-IPO shares get diluted. Before this, they had a share of 2$ worth of assets. Now they have a share of 1.5$ worth of assets. Or, from another point of view. If you own shares in a company, you want that company to do well. Having the company raise more money (for the same dilution) is going to help the company do well. Or, from yet another point of view, all these new shareholders are going to be taking a share of your dividend. You'd like the company to be able to use the new assets to grow quickly so they can pay out more dividend in total. My point is, shareholders have reason to care about more than just the share price of a company.
drocer88 6y ago
Reverse takeovers have always been legal. There's nothing necessarily wrong or evil in skipping the banks in midtown Manhattan. Nothing wrong in a direct listing , either. The Wikipedia entry on "reverse takeovers" ( https://en.wikipedia.org/wiki/Reverse_takeover https://en.wikipedia.org/wiki/Reverse_takeover ) cites the 1955 deal between REO and Nuclear Consultants, Inc. The company eventually became Nucor ( https://finance.yahoo.com/quote/NUE https://finance.yahoo.com/quote/NUE ).
- LatteLazy 6y ago
  Sorry, I thought they were banned by the SEC at some point and then unbanned, but that's wrong! I stand corrected.
christophilus 6y ago
There will still be listing standards and audit requirements, no? As far as I can tell, the IPO system was a total racket. Good riddance, I say.
- LatteLazy 6y ago
  For reverse mergers (with significant foreign assets) the audit requirements are retrospective: you list first then have 6m to audit yourself. Be careful just dismissing the current system. Being complex isn't always bad...
  - thrill 6y ago
    Complexity prevents those without deep pockets from competing.

toomuchtodo 6y ago

Are investment banks truly working that hard to prevent fraud for the inflated fees (~5%) they're charging? The SEC still has a government funded securities regulator role to play. If net benefit increases, we should celebrate when middlemen are disintermediated. If there's evidence this causes harm to non-accredited investors (any investors of significant amount really), we can strengthen regulator resources (and for likely a lower cost than continuing to shovel money to IBs for these deals).

colechristensen 6y ago
There’s a difference between a regulator and someone with a financial interest in success. There is a certain effectiveness for some kinds of problems that being financially interested in truth brings which is harder to do consistently with regulation. I am not trying to suggest a specific course is better, but pointing out that there is value in aligning doing the right thing with profit motive.
- SmellTheGlove 6y ago
  Sure, and I don't think that with this plan, there's anything stopping investment banks from agreeing to purchase direct listed shares at IPO in an arms-length transaction. Given the need to file audited financials, among other components of the regulatory burden to go public, is the investment bank charging a fee to act as a fiduciary really adding much protection?
  - colechristensen 6y ago
    There can be a sizable gap between complying with regulations to ensure X and trying to do X. lock picking lawyer had a great video on that topic recently https://youtu.be/DykUXXcJGIw https://youtu.be/DykUXXcJGIw Writing regulations is hard to achieve the intended effect. Complying with regulators frequently involves a mindset of checking boxes instead of trying to accomplish something. If, however, an investment bank essentially buys a large chunk of your company, if only temporarily, they have a real motivation to figure out if it is legitimate, and there are real consequences if you screw up, not just legislated consequences but real financial bag holding ones. You have to think of the everything-is-a-game mindset to help you evaluate situations. The game of being a regulator is different than the game of being an investor. There is value in both.
    - SmellTheGlove 6y ago
      > If, however, an investment bank essentially buys a large chunk of your company, if only temporarily, they have a real motivation to figure out if it is legitimate, and there are real consequences if you screw up, not just legislated consequences but real financial bag holding ones. Right, but what I'm saying here is, a bank can still choose to be an arms-length investor. My hypothesis is the market gets as much positive signal from that as it would a traditional underwriting syndicate, without the upside bleed-off. > You have to think of the everything-is-a-game mindset to help you evaluate situations. The game of being a regulator is different than the game of being an investor. There is value in both. I'm not conflating the two. I'm suggesting the investor signal doesn't require a traditional underwriting syndicate. Phrased another way, how many IPOs have canceled due to a failure to form an underwriting syndicate, or because of the due diligence performed by the same? WeWork comes to mind, but I don't think we needed the bank to tell us it was problematic - reading the S-1 would have been sufficient.
LatteLazy 6y ago
I won't pretend I know. That said, the main advantage to these middle men is that they agree to buy and hold (directly and for select clients) shares at IPO. That means they have skin in the game and if the price falls at IPO or soon after, they're burnt. So I guess they're doing at least some due diligence. Too often regulators only come in (decades) after frauds started (Enron, WorldCom, Wirecard). And frauds fall through cracks between regulators too as it isn't clear who is responsible for what. I'd actually like to see more of this sort of role elsewhere in finance: having your accounts signed off by a big 4 firm would mean a lot more if they had to payout in the case of fraud. But that's a somewhat different issue I just thought I'd add...
- cinntaile 6y ago
  Regarding your first paragraph about directly owning shares for themselves and for clients. That means they are also incentivized to underprice the shares so that they can make a bigger profit. They get to buy in at a lower price and sell at a higher one.
  - LatteLazy 6y ago
    Yes, that's correct. This is why the vast majority of IPOing shares RISE in price early on. Partly this is countered by the competition between banks, if Morgan Stanley tell you they can IPO you at 50usd but Jefferies say 55usd, you go with Jefferies. It's also good news for anyone who continues to hold equity (CEOs, founders, early/angle investors etc). Only the initial equity sold goes at this discount. For this reason many companies will start by offering small amounts of equity and later issuing more at the market price. Of course, its also a very hard question to answer: how much is a share of company X worth? When there is no market to reference. So the discount is also a risk premium both for fraud and for mis-valuation. I actually think IPOs are one of the hardest parts of finance to fully understand and to do and so are one of the most interesting. That's not to say that there aren't conflicts of interest and dodgy activity. Just that there are 101 moving parts.
    - cinntaile 6y ago
drcode 6y ago
My impression is their fees are closer to 50%: Somehow, only close friends of the investment banks are allowed to buy shares at the listing price, the rest of us have to wait until after the 2x price pop in the markets... at least that's what has been happening in most recent IPOs.
- smabie 6y ago
  why do owners of pre-IPO shares care? When people talk about investment banks ripping companies with regards to the IPOs, they're not talking about the public. Moreover, most retail investors aren't going to participate in the pre-market auction in the first place, so the results will be the same
  - drcode 6y ago
    There shouldn't be a pre-ipo auction, the stock market should be the auction. That's what the SEC is enabling here. This is good for the companies and good for the retail investors, bad for the middlemen.
  - rocqua 6y ago
    If a company has 1000 shares outstanding, and 2000$ in assets, and it sells another 1000 shares for 1$ a pop, then the owners of pre-IPO shares get diluted. Before this, they had a share of 2$ worth of assets. Now they have a share of 1.5$ worth of assets. Or, from another point of view. If you own shares in a company, you want that company to do well. Having the company raise more money (for the same dilution) is going to help the company do well. Or, from yet another point of view, all these new shareholders are going to be taking a share of your dividend. You'd like the company to be able to use the new assets to grow quickly so they can pay out more dividend in total. My point is, shareholders have reason to care about more than just the share price of a company.

drocer88 6y ago

Reverse takeovers have always been legal. There's nothing necessarily wrong or evil in skipping the banks in midtown Manhattan. Nothing wrong in a direct listing , either. The Wikipedia entry on "reverse takeovers" ( https://en.wikipedia.org/wiki/Reverse_takeover https://en.wikipedia.org/wiki/Reverse_takeover ) cites the 1955 deal between REO and Nuclear Consultants, Inc. The company eventually became Nucor ( https://finance.yahoo.com/quote/NUE https://finance.yahoo.com/quote/NUE ).

LatteLazy 6y ago
Sorry, I thought they were banned by the SEC at some point and then unbanned, but that's wrong! I stand corrected.

christophilus 6y ago

There will still be listing standards and audit requirements, no? As far as I can tell, the IPO system was a total racket. Good riddance, I say.

LatteLazy 6y ago
For reverse mergers (with significant foreign assets) the audit requirements are retrospective: you list first then have 6m to audit yourself. Be careful just dismissing the current system. Being complex isn't always bad...
- thrill 6y ago
  Complexity prevents those without deep pockets from competing.