Tiny IPOs return even with regulators poised to step up scrutiny
MORE aggressive enforcement is looming after new warnings about unusual trading in small initial public offerings (IPOs), which have returned in force this month.
Last week’s public acknowledgement by regulators and exchanges of the year’s bizarre trading patterns signals a crackdown is ahead, lawyers said.
“The next steps are likely to be from the SEC or the Department of Justice, which can pursue bad actors in civil or criminal proceedings,” said Erik Gordon, who teaches law and business at University of Michigan graduate schools. “The warning is unusually strong and unusually detailed.”
The notices also put the onus on the banks managing these deals to do more due diligence, Bloomberg Law analyst Preston Brewer said in an interview. He compared the situation to that of special purpose acquisition companies, in which regulators emphasised that banks need to exercise more of their gatekeeper function.
The Financial Industry Regulatory Authority (Finra) said in its statement last week that it, the New York Stock Exchange (NYSE) and Nasdaq have observed potential “pump-and-dump-like schemes” in certain small IPOs on US exchanges. The NYSE and Nasdaq also published separate warnings that day.
Pump-and-dump schemes in stocks are as old as the market itself. Someone attempts to cause an artificial run-up in a stock’s price and then sell the shares before traders catch on.
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What’s unusual is Finra and the exchanges all releasing warnings in tandem. The message is that more aggressive policing is ahead, according to James Angel, a Georgetown University professor who specialises in market structure and regulation.
“I can’t recall any other instances of this,” he said. “It signals to everybody in the industry that they’re fed up with the games going on and they’re not putting up with it anymore.”
Spokespeople for NYSE, Nasdaq and Finra declined to comment beyond their statements.
Trading reversal
The wave of small IPOs onto US exchanges resumed in force this month. At least six IPOs of US$25 million or less have already priced in November, according to data compiled by Bloomberg, a recovery for the segment after just one small deal during the whole month of October.
Dealmaking slowed as Nasdaq began asking new questions of small firms planning IPOs, including specifics about allocations, purchasers, marketing and timing.
Perhaps as a result of the increased scrutiny, the returns of these tiny IPOs have been markedly worse than the ones that raised eyebrows earlier this year with their extreme and unusually frequent price surges.
This month’s small IPOs average a 37 per cent decline from their offering price during their first session, according to data compiled by Bloomberg, a metric closely tracked by investment bankers. That compares with an average gain of 597 per cent among peers that listed earlier this year.
However, taking a step back, there are clear similarities. The latest wave of these small IPOs are trading 34 per cent below their offering prices on average, compared with a 32 per cent loss-to-date by earlier small listings that have mostly erased their surges.
Some tiny IPOs remain noticeably absent. Among deals that raised US$25 million or less — a threshold identified in Finra’s warning — companies based in China and Hong Kong haven’t priced a US IPO since the end of August.
“Many issuers or their operating subsidiaries or affiliates maintained primary operations in China, but some issuers also based their operations in other countries,” Finra’s warning says.
Still, some of the wild price swings are continuing. Video game maker Snail, for instance, opened 87 per cent higher during its second day of trading on Nov 10. The stock bounced on the company’s announcement of a buyback after a 55 per cent sell off during its first day. BLOOMBERG
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