thestandard.com
July 14, 2000, 6:05 AM PDT
Panel to Ask SEC to Make Netcos 'Fess Up
The advisors want the Securities and Exchange Commission to make Internet
startups spill their guts to new investors.
By Anya Schiffrin
If a new panel advising the Securities and
Exchange Commission has its way,
investors will know a lot more about
Internet startups before they put up their
cash.
The panel, which includes corporate
heavyweights such as venture capitalist
John Doerr and Enron (ENE) Chairman and
CEO Kenneth Lay, was pulled together by
Chairman Jeffrey E. Garten, dean of the
Yale School of Management, at the behest
of SEC chairman Arthur Levitt. Its mission:
Make sure investors have enough financial
information about new new-economy
companies to accurately value their
prospects.
In particular, the panel is considering
urging firms to provide third-party
verification of non-audited financial data
and to put information released at analyst
conference calls on the Web. The new
firms may also be encouraged to give
potential investors far more detailed
information about their business plans than
they do now, and even a frank account of
the previous successes and failures of their
managers.
So far, the panel has operated under the
radar, meeting just twice since May. In the
last session July 12, members largely
agreed on two themes: how to level the
playing field between everyday investors
and professionals; and what kinds of
information best serve prospective
investors. A final report is expected by the
end of the year.
"In the new economy, where so much
value is being created, what should
companies be reporting and disclosing that
would give investors better information
than they already have?" Garten asks. "We
are posing this question with no
preconceived answer."
The topic is one close to Levitt. In his time
at the SEC, the chairman has crusaded for
free and full disclosure. The SEC is
expected to vote in the next few months
on regulation FD, for fair disclosure, which
prohibits the release of selective
information to analysts. "The
behind-the-scenes feeding of material,
nonpublic information from companies to
analysts is a stain on our markets," Levitt
said in a speech last year. The new panel
is similarly concerned, looking at
information in the "broader perspective of
how markets function and what is their purpose," Garten says. The
SEC didn't return calls for comment.
The panel is notably not focusing on accounting issues, which have
otherwise been a concern for the agency. It recently adopted a slew
of rules aimed at making it harder for corporations to manipulate or
selectively disclose earnings information. Instead, the mandate for
the 15-member group is to identify what kind of information is needed
to value startups, given the remarkably lofty valuation levels Internet
companies have seen in recent years. Moreover, since Internet
companies have tended to go public at comparatively early stages of
development, there's far less of a track record from which to judge.
In theory, some of the panel's conclusions could eventually take on
the force of official SEC regulation. But the panel members hope,
instead, that new companies will take up any guidelines themselves.
Downplaying the group's clout, Garten says it is independent of the
SEC and simply hopes to come up with "some constructive
suggestions" which could be shared with other interested parties. He
declines to speculate as to whether the group's recommendations
would be adopted by the SEC.
Garten also stresses that it's far too early to tell what the panelists
will decide. He notes that the group – which includes RealNetworks
(RNWK) chairman and CEO Rob Glaser, Blackstone Group chairman
Peter G. Peterson and Stanford economic Professor Joseph E. Stiglitz
– has a wide range of experience. "Given the diversity of this group,
no one should prejudge where we are going to come out," Garten
says.
Whatever their conclusions, and even if they are adopted, the stock
market is likely to remain volatile for some time. Indeed, some argue
that the market moves too fast for regulators to keep up.
Given the punishment Internet stocks have felt since April, a panel
concerned with excessively high stock valuations might seem late to
the game. But that volatility is precisely the point. Despite April's
chill, new companies have started to return to the public markets,
with infrastructure companies currently in fashion. In the new
economy, investors often look at firms with high growth rates, no
earnings records and uncertain business plans and have to predict
how they will perform in the years to come. With better information in
wider circulation, investors, who can't look at a company's past to
predict its future, will be able to make decisions based on a fuller
understanding of a company's prospects.
On company business plans, the panel may want to see more
information released about company intangibles. How much money is
being spent on employee training, how much it costs to attract a
customer base and how that base will be maintained are all details
that could be useful for investors to know. The panel may also
support the disclosure of more information about performance
metrics, allowing companies to decide what they would highlight. An
early stage company may want to give information about customer
attraction while a later company may emphasize customer retention.
Rather than create new regulations, panelists are leaning toward
having the SEC create incentives that will encourage companies to
disclose higher-quality information. The question of how to account
for stock options, for example, is so complicated that it's almost
impossible to dictate one standard. Instead, it may be better for
companies to explain clearly the number, terms and potential value of
the options given to employees and let investors figure out what the
impact will be on the company's value.
Some Internet companies that have recently made their stock market
debuts like the idea. Tom Gillis, a VP at iBeam, a streaming media
company that went public on the Nasdaq market May 17, says the
guidelines are a "wonderful" idea. "The noise level is so high in the
new economy space that it's hard for informed investors to sort out
fact from fiction."
But the panel can expect its recommendations to encounter
considerable resistance from companies. For one thing, true pioneers
might find it hard to come up with accurate predictions, given the
new ground they're covering. Or, more likely, firms may balk at
providing too much information about their business plans, lest
competitors use it. And then there are fears of liability: If specifc
data raises expectations too high, aggrieved shareholders will hold it
against them. Responding to such concerns, the SEC could decide to
offer protection against legal liability for some types of unaudited
information, as well as other protections.
But if companies can be persuaded to tell the public more about
themselves, there may be a psychological effect, even if not a
tangible one. "Most of us don't think this would solve the problem of
excess volatility or even lead to a level playing field," says a panelist
who requested anonymity. "But it would improve the efficiency of the
market and the perception of a level playing field and so would stave
off demand for more regulation." |
