* Jobs Act could get rid of "whisper" estimates
* Act must still be interpreted by SEC
* Will investment banks fully embrace Jobs Act?
By Alistair Barr and Olivia Oran
SAN FRANCISCO, June 5 In the aftermath of the
Facebook IPO, investor outrage - and lawsuits - have focused on
"whisper" estimates of future results that underwriters shared
only with some clients.
The selective disclosures appeared to expose a regulatory
loophole, and some bankers and securities lawyers now say relief
could come from a surprising quarter.
The Jumpstart Our Business Startups Act, which President
Barack Obama signed into law in early April, has been criticized
for watering down regulations governing capital raising and
increasing the potential for fraudulent stock sales. But the law
also eases restrictions on what companies and analysts can say
and do in the run-up to an initial public offering, which in
turn could mean broader disclosure of some kinds of information.
In the case of Facebook, research analysts working
for the underwriters reduced their forecasts just days before
the IPO, and then shared the new estimates orally - whispered
via conference calls - with some institutional investors.
With Facebook's shares now trading more than 25 percent
below their May 18 offering price, retail investors have
complained that they did not have access to vital information
that was available to big professional investors.
Lead underwriter Morgan Stanley has insisted that
limited disclosure of forecasts, far from breaking any rules,
was standard procedure for an IPO and in compliance with all
applicable regulations. Rules designed to protect investors
prohibit underwriters from publishing research on pre-public
companies, while allowing verbal communication of such
That interpretation of the law and its ability to change
research practices remains to be seen. The JOBS Act allows
companies to communicate orally and in writing with investors
before they file for an IPO. It also allows analysts employed by
the underwriting banks to communicate more broadly with
investors through written research reports before IPOs.
The new law applies only to companies that have less than $1
billion of annual revenue. That means Facebook, with 2011
revenue of $3.71 billion, would not have qualified. But the vast
majority of start-up company IPOs fall into the sub-$1 billion
"If the JOBS Act lives up to its advance billing, there will
be no need to whisper," said Jim Tanenbaum, a partner at law
firm Morrison & Foerster.
"The JOBS Act permits robust communications with
institutional investors prior to an offering," he added. "To the
extent that material information is conveyed in such
communications, issuers and underwriters will need to make
certain that the same, or equivalent, material information is
made available at some point in the offering process to all
The JOBS Act has not yet been fully interpreted by the
Securities and Exchange Commission and other regulators, and
details of the new rules could also be influenced by inquiries
into the problems arising from the Facebook IPO.
Meredith Cross, director of the SEC's Division of Corporate
Finance, said during an April 11 legal panel - before Facebook's
debut - that the regulator will want to understand whether
information shared by companies ahead of IPOs may be of interest
to investors generally.
The SEC declined to comment further.
Anna Pinedo, a partner at Morrison & Foerster who attended
the April 11 panel, said Cross's comments likely mean the SEC
will ask to see what information companies share with investors
and analysts to make sure it is consistent with what has been
IPO veteran Bill Hambrecht of WR Hambrecht & Co said his
investment bank plans to make any earnings estimates and other
research available to all investors.
"This new rule change is significant," Hambrecht said. "If
you have a whisper estimate out there and you don't make it
available to all investors you may have a very difficult time."
Other investment banks may not embrace the changes as
enthusiastically as Hambrecht, for legal and competitive
Companies and their underwriters worry that if they publicly
disclose specific financial forecasts, they could be sued if the
company ends up missing those estimates.
If analysts' pre-IPO estimates reflect their own views,
rather than information fed to them by the company, there may be
less pressure to publicly disclose, Pinedo said.
But the Facebook situation exposed the contradictions in the
In so-called teach-in meetings earlier in the year, Facebook
helped analysts build financial models, as well as revenue and
earnings estimates for the company. But on May 9, the company
filed a revised IPO document with the SEC, warning that ad
growth not keeping up with user growth in the second quarter, as
more people accessed the social network through mobile devices.
The warning was vague. But soon after, almost all the
underwriter analysts cut their estimates, including Scott
Devitt, an Internet analyst at lead underwriter Morgan Stanley.
Investors who were told by Morgan Stanley about the reduced
forecasts said it is common for companies to provide earnings
guidance to analysts as part of preparation for an IPO, and they
understood that Facebook had urged the analysts to reduce their
guidance after the revised SEC filing.
What was unusual in Facebook's case was that forecasts were
changed so late in the process, the investors said. Facebook and
Morgan Stanley declined to comment.
"The reality is that for every major IPO there is a whispered
estimate being used by the institutional market. But that is
never available for retail investors," said Hambrecht.
"The Facebook offering made this weakness very apparent. It
was such an obviously unfair approach," he added. "Now these
estimates are going to have to be made available."
While several lawsuits have been filed against Facebook and
Morgan Stanley, securities lawyers, IPO experts and even retail
investor advocates say the companies appeared to be following
restrictive IPO rules.
"As long as they did not say anything that contradicts what
they put in their IPO filings, they are OK," said Barbara Roper,
director of investor protection at the Consumer Federation of
The current rules, restricting what companies and
underwriter analysts can say and write before an IPO, were
designed to prevent stocks being hyped to investors, she noted.
"A system that's supposed to protect retail investors
appears to have prevented them from getting an adequate warning
in this case," Roper said. "This business of what you can and
can't say around the time of the IPO deserves greater scrutiny."