SEC calls for public comments on future IPO issues and its issuance
View(s):The Securities and Exchange Commission (SEC) has called for public representations on a ‘white’ paper on Initial Public Offering (IPO), an issue that has drawn a lot of flak in the stock market.The SEC has asked for comments on IPO grading for upcoming listings and from independent stock market research.
The SEC in its consultation paper describing the rationale for this says that it is done in a bid to give the potential retail/institutional investor with an ‘independent view’ on the fundamentals and prospects of the particular firm seeking to go public. “The investor has only the IPO prospectus to go by and at times it may not be read or grasped by some,” the paper says, noting that without independent research, there’s also a risk that a firm which is successful at raising capital ends up in financial difficulties shortly after the IPO.
According to the SEC paper, an IPO grade is a relative assessment of the fundamentals of that issue compared to the listed company shares. Ratings are generally assigned on a five-point scale, with a higher score indicating stronger companies.
The paper further says that a rating agency which is registered with the SEC can bridge this information gap with an IPO grading giving an independent and an objective analysis which will enhance an investor’s ability to come to an informed investment decision. “Prospective issuers with strong fundamentals and good prospects can be in a position to justify a higher share price, as a result of getting a higher IPO grade,” it says. An SEC source told the Business Times that in the recent past unjustifiably high pricing of IPOs were rampant and that some of these firms’ fundamentals didn’t warrant these high prices.
“IPO grading will facilitate additional information about those firms hoping to list or those without any track record of their performance available to the investors, helping them assess the issue before investing and burning their fingers,” the official said, noting that this is additional investor information and assistance to enable informed investment decisions and more realistic pricing of shares.
An analyst noted that such a mechanism helps companies in that if they are given a higher score, demonstrating stronger fundamentals they can command a higher premium for their issue.
The consultation paper noted that unbiased research reports with in-depth analysis of the fundamentals and valuations of listed firms will encourage informed investment decisions. “Independent analysts’ advice is of crucial importance as they provide investors with an unbiased, analytical view by a third party,” it added.
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