Tuesday, April 3, 2012

Henry Blodget knows SEC's job is ensuring disclosure and not preventing stupid investment decisions

In his Business Insider column, Henry Blodget takes on Andrew Ross-Sorkin's NY Times Dealbook column on the JOBS Act and its repeal of disclosure requirements.

The essence of Ross-Sorkin's argument is that in the absence of disclosure, market participants are no longer investing, but blindly gambling. [A point that your humble blogger has been making about structured finance securities since before the financial crisis began.]

So Mr. Obama may want to weigh the fate of Groupon’s investors as he sits down on Thursday to put his signature on the Jumpstart Our Business Startups Act....
The measure, known as the JOBS Act, is a well-intentioned bill with bipartisan support aimed at making it easier for small businesses to find investors early and to continue to grow in the public markets by lowering some of the bureaucratic barriers.... 
the legislation, in the name of creating jobs, dismantles some of the most basic protections for the most susceptible investors apt to be drawn into get-rich-quick scams and too-good-to-be-true investment “opportunities.”...
But it is awful for the investors, who rely on the transparency of the process.... 
Steve Case, the co-founder of AOL, was one of the biggest behind-the-scenes proponents of the JOBS Act ... As for criticism that the law goes too far in loosening disclosure rules, he said, “It’s not perfect,” but he added, “I’m confident we’ll strike the right balance.” 
Mr. Case also made the argument, correctly, that all regulation can’t protect everybody.... 
More important, however, he made a profound, perhaps inadvertent, remark about the business people’s state of mind on investing, suggesting that it still may be analogous to a casino. 
“I don’t want to sound flip about this, but you don’t have to be an accredited gambler to go to Las Vegas,” he said. “Anyone can walk into a casino and lose an unlimited amount of money.” He added, “I’d rather they invest that money.” 
Mr. Case is right: there are few built-in protections for gamblers. 
But investing is supposed to be different. 
Mr. Blodget focuses on the investment results experienced by the Groupon IPO investors and argues that repealing disclosure requirements is okay as the definition of a market is that for every trade there is a winner and a loser.

What just happened to Groupon investors?
Well, those who bought Groupon the IPO price or immediately after the IPO--and held onto it--have gotten demolished. 
So, we should tighten IPO regulations, not weaken them, right? 
Absolutely not. 
The reason investors lost money on Groupon, as well as Demand Media,Pandora, and other flame-out IPOs, is not that regulation failed. It's that the investors paid too much for the stocks.

The SEC gave Groupon a proctology exam before it went public. That didn't stop the stock from cratering. And it cratered long before the embarrassing earnings restatement Groupon announced last Friday. 
And it's not as though there wasn't a healthy diversity of opinion about Groupon's prospects before and after the IPO. 
Many analysts, including Jim Cramer and yours truly, were screaming from the rooftops that Groupon was overvalued--a crash waiting to happen.... 
Investors who bought Groupon on the IPO chose to ignore these warnings. Importantly, these Groupon bulls might have been right. That's what makes a market, after all. One investor on each side of the trade, one of whom is right, the other of whom is wrong.
Mr. Blodget knows that it is not the SEC's job to make investment recommendations or prevent investors from making what turn out to be stupid investment decisions.  It is the SEC's job to ensure that for each investment all the useful, relevant information is made available to market participants in an appropriate, timely manner.

The act of investing involves using this information in assessing the risk of and valuing an investment.

Without access to all the useful, relevant information, investors are not investing, but rather blindly gambling.

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