SFC appears to be in la-la land over listing documents

PUBLISHED : Sunday, 08 July, 2012, 12:00am
UPDATED : Sunday, 08 July, 2012, 12:00am


'Many draft listing documents failed to provide meaningful disclosure on the listing applicants' risks, historical financial performances and future plans for investors to make an informed assessment of the applicants' businesses and prospects.'

Securities and Futures Commission

Let's describe the world that the SFC's statement portrays. In this world a company seeking a listing on the stock market first of all prepares a thick prospectus, listing in detail all the things the SFC mentions and many more besides, most specifically the offer price.

It then publishes this prospectus with a print run that would do a career novelist proud. Anyone considering the stock can easily obtain a copy at no cost and has plenty of time to pore over all the information in it before the subscription books open for applications to the offering.

There is something I would like to make clear at this point. The world I live in is the third planet in orbit around a minor star called the sun, which is located in the Orion Arm of the Milky Way galaxy. Where the SFC's world is I haven't a clue.

There was a time when our world was a little like the one the SFC envisions but that was long, long ago. What happens now in an initial public offering is quite different.

We start with investment bank sharks scouring the ground for listing candidates and, when they find one, fighting each other off with competing claims of how high a share price each achieved for a similar listing candidate recently.

This is very mercenary, of course, but public relations shills can always say afterwards that the process is much more complex and takes in many societal considerations. Uh-huh.

The winning banker then turns to a range of different professionals to cobble together the required listing documents. He does none of the work himself. He is a salesman. His job is done when the listing candidate appoints his bank for the job and he is then immediately sent back to the hunting grounds.

Whether the professionals in charge of the listing documents do a good job is a moot point. The intended readers of these documents are not allowed to see the signed and authorised versions before they make a decision on whether to buy the stock.

There is a reason for this. If the prospectus was published before subscriptions to the offer open, the underwriters would be at risk. Were the public not to take up all the shares, the underwriters would be obligated to buy the remainder at the offer price.

Underwriters like underwriting fees but they shun underwriting risk. The first thing they do, therefore, is call up the institutional fund managers to whom they plan to sell the offering and negotiate the price at which it will be done, along with the allocations for each investor. Only when this task has been finished are the documents signed, the price firmly fixed and the prospectus published.

The retail trade may have a day or two to read the prospectus before the offer closes but I have yet to meet a retail investor who ever did. The retail market is only normally given a tiny share of the uptake anyway (unless it's a real stinker, of course).

It gets worse than this. Not only do the underwriters get their underwriting fee without taking an underwriting risk but they are permitted to rig the market immediately after the listing through a form of manipulation called the 'green shoe'.

The trick here is to give themselves the right to buy back about 15 per cent of the offering on the market if the price drops after listing, or sell an additional 15 per cent if it soars.

But this must be illegal, you say. Market manipulation is a crime. People go to jail for it. Surely an SFC that wants to criminalise people who do not correctly second guess its wishes in corporate disclosure would long ago have stamped out this practice.

Yes, well, good point. Any of you people at the SFC care to answer it?

But let us accept that the hypocrisy of our overly righteous regulators is by now well established and content ourselves with the obvious question to them here.

Why are you so concerned about formal disclosure of what is in the listing documents when the people to whom it is to be disclosed don't get to see it in time anyway?