Ahead of I.P.O., S.E.C. Pressed Groupon On Accounting
By EVELYN M. RUSLI
DealBook
New York Times
December 28, 2011, 7:05 pm
Ahead of Groupon‘s highly anticipated initial public offering in November, the Securities and Exchange Commission repeatedly pressed the daily deals giant to defend its business model and its accounting measures, according to comment letters recently disclosed.
The letters, sent by the S.E.C. between June 29 and October 3, provide an interesting window into the back-and-forth discussions between the Internet company and its regulators in the months leading up to its I.P.O. In the letters, the S.E.C. seemed somewhat skeptical of Groupon’s business model and called on the company to balance its bullish statements with additional disclosures. Regulators also asked Groupon to address comments made by executives during the so-called quiet period, which seemed to defy S.E.C. rules.
Shares of Groupon slipped nearly 2 percent on Wednesday to close at $22.62 per share.
In the first letter, dated June 29, the S.E.C. outlines 73 comments, spanning 14 pages. Among the comments, regulators called on Groupon to list specific risk factors for its international operations, provide additional data on consumer attrition and repeat merchants, and to temper certain statements about the company’s growth prospects. In one section, for instance, the regulators advise the company to re-frame a comment made by chief executive Andrew Mason that “‘Groupon is better positioned that any company in history to reshape local commerce’ by noting the company’s net losses and competitive landscape.”
In response to another statement made by Mr. Mason, that “our customers and merchants are all we care about.” The regulators reminded Groupon of its responsibility to its investors:
“Please balance the statements regarding the premise that your customers and merchants are all you care about with a discussion of your fiduciary duty to shareholders.”
As evident in the letters, the S.E.C. spent a lot of time parsing the statements of Groupon’s executives on and off the prospectus. In its first comment letter, regulators called on the company to address a Bloomberg News interview, during which co-founder Eric Lefkofsky said the not-yet-profitable Groupon was going to be “wildly profitable.” Several months later, the S.E.C. also asked the company to provide the full text of an internal e-mail sent by Mr. Mason, which was somehow leaked to the press.
Notably, the S.E.C. was particularly clear about its reservations on Acsoi, or adjusted consolidated segment operating income, an uncommon financial yardstick Groupon introduced in its first filing. In the June 29 letter, the S.E.C. said Acsoi — which is essentially operating profit stripped of marketing and acquisition costs — was somewhat misleading to prospective investors:
It appears that online marketing expense is a normal, recurring operating cash expenditure of the company. Your removal of this item from your results of operations creates a non-GAAP measure that is potentially misleading to readers. Please revise your non-GAAP measure accordingly.
The exchange between the S.E.C and Groupon, reveal the company’s initial resistance. In a July 14 letter to the S.E.C., the company tried to defend its math, arguing that Acsoi does include some expenses related to marketing for existing subscribers. The S.E.C. was not swayed, and in a subsequent letter, simply asked for its removal. On October 10, Groupon complied in a revised filing.
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