A recent directive by the Securities and Exchange Commission (SEC) barring for a year investors trading in stock they boughtt through a private placement in a company that subsequently went public is likely to be revisited at SEC’s commission meeting to be held on Wednesday, according to sources close to SEC.
The SEC rule says that anyone who participates in a private placement after March 1, 2011 cannot trade these shares in the company after its Initial Public Offering (IPO).
It says that shares allotted to private equity investors should be locked for a period of one year from the date of allotment, prior to its listing. This move by the regulator is to prevent speculative investors from subscribing to private placements with the intension of cashing out during the post- IPO trading. “But they are considering changing it and they discussed it on February 8,” a source close to SEC told the Business Times.
An analyst told the Business Times that this prevents the high networth investors (HNWI) from cashing in on their gains as soon as the company starts trading after the IPO. He said these HNWIs are promised a ‘sizeable’ return to them ((double or at times triple the return) after a company is listed. “They are making some noises and many managers to IPOs want the SEC to revisit this rule,” the SEC source said.
He said that the SEC may change the timeline from March 1, to somewhere in April.
Analysts say that these rules are timely. “This is quite common in more developed capital markets including our neighbour India. The rationale being that no class of investors should gain an undue advantage over another. This is what happens during pre-IPO private placements when larger investors obtain their desired allocations vis-à-vis only a fraction for IPO investors. So the SEC is only bringing in international best practices with regard to this matter,” Deshan Pushparajah, Manager Corporate Finance, Capital Alliance told the Business Times.
Analysts said that the IPO hype has seen many rich and well-connected parties take advantage of the folly and over eagerness of the investing public. “The SEC directive was a good thing, because there were instances where people started to do private placements sometimes below the IPO price and because of that on the first day the prices could decline because these people who got the shares at very low prices sold out,” Dimantha Mathew, Analyst Capital Alliance said.
He said that it’s an unfair advantage. “So now when someone buys shares through a private placement, they cannot sell it immediately as they are required to wait for one year. This gives fairness to those buying through the IPO," he said.
Danushka Samarasinghe, Director Research TKS Holdings said that private placements are normally done before going public to raise needed capital to uplift the company. “So such private investors are expected to be long term investors in the company. In other words they should not exit at the earliest possible situation.”