SAN FRANCISCO (07/17/2000) - If a new panel advising the Securities and Exchange Commission has its way, investors will know a lot more about Internet startups before they put up their cash.
The panel, which includes corporate heavyweights such as venture capitalist John Doerr and Enron Chairman and CEO Kenneth Lay, was pulled together by Chairman Jeffrey E. Garten, dean of the Yale School of Management, at the behest of SEC chairman Arthur Levitt. Its mission: Make sure investors have enough financial information about new new-economy companies to accurately value their prospects.
In particular, the panel is considering urging firms to provide third-party verification of non-audited financial data and to put information released at analyst conference calls on the Web. The new firms may also be encouraged to give potential investors far more detailed information about their business plans than they do now, and even a frank account of the previous successes and failures of their managers.
So far, the panel has operated under the radar, meeting just twice since May.
In the last session July 12, members largely agreed on two themes: how to level the playing field between everyday investors and professionals; and what kinds of information best serve prospective investors. A final report is expected by the end of the year. "In the new economy, where so much value is being created, what should companies be reporting and disclosing that would give investors better information than they already have?" Garten asks.
"We are posing this question with no preconceived answer." The topic is one close to Levitt. In his time at the SEC, the chairman has crusaded for free and full disclosure. The SEC is expected to vote in the next few months on regulation FD, for fair disclosure, which prohibits the release of selective information to analysts. "The behind-the-scenes feeding of material, nonpublic information from companies to analysts is a stain on our markets," Levitt said in a speech last year. The new panel is similarly concerned, looking at information in the "broader perspective of how markets function and what is their purpose," Garten says.
The SEC didn't return calls for comment. The panel is notably not focusing on accounting issues, which have otherwise been a concern for the agency. It recently adopted a slew of rules aimed at making it harder for corporations to manipulate or selectively disclose earnings information. Instead, the mandate for the 15-member group is to identify what kind of information is needed to value startups, given the remarkably lofty valuation levels Internet companies have seen in recent years. Moreover, since Internet companies have tended to go public at comparatively early stages of development, there's far less of a track record from which to judge. In theory, some of the panel's conclusions could eventually take on the force of official SEC regulation. But the panel members hope, instead, that new companies will take up any guidelines themselves.
Downplaying the group's clout, Garten says it is independent of the SEC and simply hopes to come up with "some constructive suggestions" which could be shared with other interested parties. He declines to speculate as to whether the group's recommendations would be adopted by the SEC. Garten also stresses that it's far too early to tell what the panelists will decide. He notes that the group; which includes RealNetworks chairman and CEO Rob Glaser, Blackstone Group chairman Peter G. Peterson and Stanford economic Professor Joseph E.
Stiglitz; has a wide range of experience.
"Given the diversity of this group, no one should prejudge where we are going to come out," Garten says. Whatever their conclusions, and even if they are adopted, the stock market is likely to remain volatile for some time. Indeed, some argue that the market moves too fast for regulators to keep up. Given the punishment Internet stocks have felt since April, a panel concerned with excessively high stock valuations might seem late to the game.
But that volatility is precisely the point. Despite April's chill, new companies have started to return to the public markets, with infrastructure companies currently in fashion. In the new economy, investors often look at firms with high growth rates, no earnings records and uncertain business plans and have to predict how they will perform in the years to come. With better information in wider circulation, investors, who can't look at a company's past to predict its future, will be able to make decisions based on a fuller understanding of a company's prospects. On company business plans, the panel may want to see more information released about company intangibles.
How much money is being spent on employee training, how much it costs to attract a customer base and how that base will be maintained are all details that could be useful for investors to know. The panel may also support the disclosure of more information about performance metrics, allowing companies to decide what they would highlight. An early stage company may want to give information about customer attraction while a later company may emphasize customer retention. Rather than create new regulations, panelists are leaning toward having the SEC create incentives that will encourage companies to disclose higher-quality information.
The question of how to account for stock options, for example, is so complicated that it's almost impossible to dictate one standard. Instead, it may be better for companies to explain clearly the number, terms and potential value of the options given to employees and let investors figure out what the impact will be on the company's value. Some Internet companies that have recently made their stock market debuts like the idea. Tom Gillis, a VP at iBeam, a streaming media company that went public on the Nasdaq market May 17, says the guidelines are a "wonderful" idea. "The noise level is so high in the new economy space that it's hard for informed investors to sort out fact from fiction." But the panel can expect its recommendations to encounter considerable resistance from companies. For one thing, true pioneers might find it hard to come up with accurate predictions, given the new ground they're covering. Or, more likely, firms may balk at providing too much information about their business plans, lest competitors use it.
And then there are fears of liability: If specifc data raises expectations too high, aggrieved shareholders will hold it against them. Responding to such concerns, the SEC could decide to offer protection against legal liability for some types of unaudited information, as well as other protections. But if companies can be persuaded to tell the public more about themselves, there may be a psychological effect, even if not a tangible one. "Most of us don't think this would solve the problem of excess volatility or even lead to a level playing field," says a panelist who requested anonymity. "But it would improve the efficiency of the market and the perception of a level playing field and so would stave off demand for more regulation."