Will JOBS Act lead to more Groupon-like incidents?
The Groupon IPO was in many ways a disaster from the start. It got off to a rocky recovery, and despite a decent debut, it has since tanked in the aftermarket, thanks in part to the news that it was forced to restate earnings and admit its auditor had found internal control weaknesses already.
Whew! That was fast. It has been a public stock for only four months. The company has sunk to new lows. In hindsight , the company was nowhere near ready to go public. Recall its highly publicized string of accounting problems that resulted in significant delays to its offering.
In the wake of the passage of the JOBS Act, many have seized on the sins of Groupon as an example of why the law's attempts to roll back Sarbanes-Oxley Section 404(b) provisions is misguided. To be sure, Dodd-Frank included some provisions that effectively exempted small companies form 404(b). Groupon's market cap, however, was high enough that it is bound by the provisions. So one could argue that the law did nothing to prevent Groupon's accounting mistakes.
We've seen a lot of corporate implosions since 2008, led by Lehman Brothers of course, and all of these occurred despite the fact the companies were bound by 404(b).
It's not yet clear whether one can conclude 404(b) simply doesn't work. It fact, that would be a hard argument to make. The reality is that restatements have declined dramatically for large companies, who have been forced to comply with 404(b) for many years now. The soundness of their reporting has been enhanced significantly in the eyes of shareholders. That's not to say that they have fared well in the market; the economic turmoil has been intense. And that's not to say that 404(b) is the only reason restatements have declined.
But internal controls do matter. And by forcing newly public companies to go all out and invest significantly to produce sound statements, 404(b) certainly had its appeal. Where will that discipline come from now?