Questioning the mini-IPOs
Small firms, big risks
One executive was convicted of filing false tax returns, another for obstructing justice and a third was accused of selling unregistered stock.
But three tiny companies with ties to these executives have now gone public in the US in what may just be the zaniest little market on Wall Street: mini-IPOs.
These companies — just seven so far — are far from blue chips. One went public recently on the New York Stock Exchange with a value of just $43 million, most of that from mom-and-pop investors. That’s less than 1/100th the size of Apple.
And some of the securities firms bringing these companies to market aren’t exactly blue chip, either. A couple have checkered records themselves. Authorities’ advice: buyer, beware.
“These offerings are extremely difficult to police,” said William Galvin, the top securities regulator for Massachusetts.
None of the companies has been accused of wrongdoing. But these super-small initial offerings are seriously high-risk investments. All but one have lost value since going public — an average drop of about 34 percent.
Mini-IPOs grew out of the Jumpstart Our Business Startups Act, a 2012 law that was supposed to eliminate red tape, help small companies go public and, ultimately, spur the economy.
Yet there’s little evidence the JOBS Act has actually encouraged many IPOs or created many jobs.
Their number has declined over the past two decades, with the drop becoming more pronounced in recent years because companies can raise plenty of money from private equity and venture capital firms, according to Robert Bartlett, a law professor at the University of California, Berkeley. Regulatory hurdles play a smaller role, he said.
Under the law’s Regulation A+, adopted by the Securities and Exchange Commission in 2015, tiny companies can sell shares with limited disclosure requirements and seek money from less well-off investors even if the securities don’t trade on a major stock exchange. The Trump ad- ministration wants to increase the maximum size of these socalled crowdfunding offerings to $75 million from $50 million.
The SEC declined to comment. The regulator has said about 25 firms raised more than $235 million under Regulation A+ through 2016. Most haven’t listed shares on an exchange. SEC rules bar company officials from participating in mini-IPOs if they have certain securities law violations within the past 10 years.
The latest of these mini-IPOs came last month when FAT Brands, owner of restaurant chains including Fatburger and Ponderosa Steakhouses, raised $24 million.
CEO and founder Andy Wiederhorn, a former Wall Street deal-maker, served a 14-month sentence from 2004 through 2005 for filing a false tax return at a previous business he ran, FAT Brands said in an SEC filing in October.
“My settlement with the government and the related conviction trace back to a business restructuring that occurred in 1998, almost 20 years ago,” Wiederhorn said in a statement.
“The SEC and Nasdaq had no objection to my role as CEO and I believe investors take comfort in that, ” Wiederhorn’s statement added.
The stock has dropped 26 percent since listing. Wiederhorn said the early trading isn’t indicative “of how we will be measured.”