Net grocer Webvan did an almost unheard of thing when it decided to postpone an initial public offering for this week that was expected to do very, very well.
And in doing so, it taught the attention-hungry IPO market an almost unheard-of lesson: Too much buzz can be a bad thing.
Webvan, the Web site and grocery delivery service founded by bookstore magnate Louis Borders, disclosed late Wednesday that it put off its planned US$300 million IPO for an undetermined length of time. The offering, initially slated for Friday, was to be the largest and among the most closely watched deals of the week.
The trouble is, the offering was a bit too closely watched, especially by the Securities and Exchange Commission. Or, as Webvan put it, in its sole statement on the matter:
"In view of the significant amount of publicity with respect to Webvan's proposed public offering, the SEC and Webvan have agreed to a cooling off period."
The snafu Webvan ran into stems from so-called quiet period restrictions on companies that are about to go public. The 1930s-era restrictions, originally designed to protect investors from receiving false or over-hyped information, prevent companies from speaking freely to the public while registered to sell shares.
Webvan's case illustrated a dilemma faced by scores of companies planning initial public offerings, who find their ability to convey information constrained by quiet period regulations.
SEC regulations say a pre-IPO company is supposed to disclose its business plans to the public in a detailed regulatory filing known as a prospectus. Although companies traditionally conduct "road shows" where they talk up their business prospects to big-ticket investors, the information they can provide to the general public is strictly restrained.
SEC officials didn't specify what Webvan had done to necessitate postponing its IPO. Possibilities include the massive publicity and media attention the company generated or statements it made during its road show that weren't in its prospectus.
The SEC doesn't often require companies to put off an IPO days before its planned debut, securities law experts said. But modern communications technology is making it harder for companies to adhere to regulations.
After all, this isn't the 1930s. In an era when PC-equipped investors are making decisions without a broker, the SEC regulations that created the quiet period actually may be hurting investors by hindering the flow of information out of the company.
"The area that needs the most attention is still the regulation of the communications process," said Stanley Keller, a securities lawyer at Palmer and Dodge. "The unrealistic constraints on communications are really based on the old paper model from the mid-20th century, and we're now living in an area of advanced electronic communication."
Steven Wallman, a former SEC commissioner and head of Internet financial services startup folioTrade, says he'd like to see the quiet period restrictions updated for the Internet age, an issue the SEC has addressed but done nothing about.
Although the law's original intent of protecting investors from speculative hype is still valid, Wallman said, the restrictions should be revised to reflect technological changes.
"It is harder now for companies to contain and constrain the information written about them," Wallman said.
It's also harder for companies to keep themselves quiet.
In the current IPO market, launching a successful public offering isn't only about selling shares. A successful IPO can do wonders for getting a company's brand established. Startups like eBay or theglobe.com were relatively low-profile players before they gained fame and fortune with amazingly lucrative stock market debuts.
And so, in the era of the IPO as marketing event, companies often have a tough time balancing the desire for a high-profile debut with the demand for silence imposed by federal regulators.
The balancing act seems particularly difficult for a company like Webvan, which has to maintain a line of communication with its customers, and could in the process make statements that contain the kind of business information that's of interest to investors.
"Occasionally business needs and investor protection needs collide," Wallman said. "It is really a gray and fuzzy line, but when the line is crossed, you may have to postpone an offering."
