IP Uh Oh
Has Blogging Become the New Insider Trading?
“People think there is a distinction between how an major investor can talk about a public company versus a private company,” said Ralph Ferrara, former General Counsel for the SEC. “But if you read the law carefully, you see that everything that you can do wrong when combining a public company with the media applies to investments in private companies as well.”
Michael Arrington wanted to have it all. The editor-in-chief of TechCrunch, the nation’s most powerful tech blog, had, except for a brief hiatus, invested his own money in the companies he covered. The move always prompted a bit of grumbling in the blogosphere, but nothing he couldn’t handle.
Then Mr. Arrington decided to go bigger. He tapped Silicon Valley’s royalty to raise a $10 million pool he dubbed CrunchFund.
IP Uh Oh
While you were distracted with the “nuclear situation” over at TechCrunch, Groupon, apparently, took the opportunity to make things even more toxic for itself in the press by once again flouting the SEC-mandated quiet period between filing for an IPO and actually going public.
Just before the long weekend, Michael Buckley from Brunswick Group, a PR firm employed by Groupon, not only called peHUB reporter Connie Loizos to complain about a story, but to get her facts straight, Mr. Buckley suggested taking a look at a leaked memo from Groupon CEO Andrew Mason that somehow found its way into Kara Swisher’s hands at AllThingsD. Yup, the very same leaked memo that Henry Blodget alleged violated securities law. Ms. Swisher’s role in that aside, as Ms. Loizos points out, the quiet period does not permit “calling journalists and urging them to read leaked CEO letters.”
As Fortune.com‘s Dan Primack sees it, however, the fault lies with the SEC, not Groupon. In the latest issue of the magazine, he makes his position clear with the headline, “It’s time to kill the IPO quiet period.”
Henry Blodget knows a thing or two about securities violations. During the dot-com boom he rose to the the position of number one Internet analyst at Merrill Lynch. Bu after the bubble burst, he was indicted by Elliot Spitzer for securities fraud, when emails emerged that showed him bad mouthing stocks in private that he was pumping up in public. Mr. Blodget agreed to pay $4 million in total and was banned from the securities business for life.
Today Mr. Blodget, in his reincarnation as a tech blogger at Business Insider, pointed out what he saw as a suspicious series of events. Groupon, which has filed for an IPO, has been taking a lot of heat from both the press and the SEC over its unique accounting methods. Because of the SEC’s “quiet period”, which prohibits companies who have filed for IPO from promoting themselves, Groupon cannot defend itself publicly.
But Blodget argues that, “The clever method Groupon is using to try to get around the SEC’s quiet period rule is writing a detailed public communication in the form of a CEO “letter to employees” that Groupon has then distributed publicly with the help of a trusted media outlet.”
UPDATE: The FTC said, via Twitter, that it does not plan to investigate Mr. Kutcher.
With the scintillating cover line “Forget Hollywood: Ashton Kutcher is Silicon Valley’s Secret Weapon,” the latest issue of Details tries to make the case that @aplusk is an investor first and an actor second. No surprise here, after all Mr. Kutcher recently described the kind of mentorship he offers start-ups in his portfolio, telling TechCrunch:
“There are certain people in the media world that can be really, really influential to a company. And I can kind of get a return phone call from most people that I place a call to. That level of introduction for people when they’re first starting out a company can become extremely valuable.”
Unfortunately for Mr. Kutcher his “extremely valuable” skill may end up running him afoul of the feds, reports Bits blog‘s Nick Bilton.
One of the reasons a bubble formed in the tech sector back in the 1990s was that companies with very little history and flimsy financials were able to go public at hundred million dollar valuations. While the market for tech IPOs seems to be gathering steam, one encouraging sign is that the SEC is taking a hard look at some of the questionable accounting of Groupon, which has drawn a lot of criticism for its fishy S-1 filing and rush to spend capital paying back early investors and employees.
Groupon had an operating loss of $420 million last year. But the daily deal giant asked that stock pickers use a strange metric to gauge the company’s profitability: adjusted consolidated operating incomes, or adjusted CSOI. As Reuters Breaking Views column pointed out, “Strip out marketing expenses, acquisition-related costs, stock compensation, interest expense and payments to the tax man and, presto, the Chicago startup led by Andrew Mason earned $60.6 million. If investors accepted this fantastical form of accounting, all sorts of companies would be worth billions more too.”
If you’ve been wondering why it’s taking so long to get the Dodd-Frank financial reform act implemented, here’s one example: Nearly a year after declaring that venture capital funds would be exempt from new registration requirements for private equity and hedge funds, the SEC finally attempted to define what they mean by “venture capital” Read More
The Securities and Exchange Commission threw out five bullet points for what makes a VC fund. Dan Primack at Fortune rounded it up. 1. VC fund must invest primarily in qualifying investments, which generally are equity securities directly acquired by the fund. There is an exempt basket of 20% of a fund’s capital commitments. Read More
Via our favorite public documents-scrutinizing blog, Footnoted.com, comes this gem: A man in Texas filed a form 4/A–”Changes in Beneficial Ownership”–with the Securities and Exchange Commission alleging ownership of 999 billion shares in Microsoft for $999 billion. The regulatory agency didn’t notice, apparently, that 999 billion is more than 118 times the number of Microsoft shares in existence.
One of the most interesting and tectonic shifts in the world of tech start-ups has been the emergence of robust markets for buying and selling private shares.
The SEC’s announcement last week that it is was considering relaxing the rules around private shares was met with strong reaction from the VC community.
New York investor Roger Ehrenberg penned a post this morning for Fortune arguing that the private markets were in need of some rationality.