Signed into law in April, the Jumpstart Our Business Startups Act required the U.S. Securities and Exchange Commission to allow an exemption for crowdfunding, a legislation that allows for a wider pool of small investors with fewer restrictions to be involved in the sales of securities.
New regulations approved by the SEC last week fulfill this mandate.
The rule, reported MarketWatch, will permit bank analysts to participate in pitch meetings with most prospective initial public offerings businesses, “as long as they don’t solicit investment banking business there.” Qualifying IPOs — those with less than $1 billion in annual revenue — amount to at least 90 percent of all initial public offerings.
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Not all bank analysts will be included in the new legislation. Analysts from 11 banks, will not be allowed to participate in the meetings. The 2003 Global Analyst Settlement between U.S regulators, including former New York Attorney General Eliot Spitzer, and the institutions implemented several structural reforms, including one that stated: “Firms will create and enforce firewalls between research and investment banking reasonably designed to prohibit improper communications between the two.”
The SEC will still require all banks in the settlement, including Morgan Stanley (NYSE:MS) and JPMorgan Chase (NYSE:JPM), to prohibit communication between analysts and investment banking personnel. However, analysts at firms like Raymond James (NYSE:RJF), Lazard (NYSE:LAZ), and William Blair can attend the meetings.
According to MarketWatch, the banks subject to the settlement have no plans to contest the requirements. The Securities Industry and Financial Markets Association did ask the SEC in April to amend the settlement to be consistent with the JOBS Act, but the SEC refused.
But academics are not convinced that SEC regulations will be enough. Sanjai Bhagat, a finance professor at the University of Colorado at Boulder, told the publication that “We are moving into a world where the SEC and [the Financial Industry Regulatory Authority are micromanaging the relationship between analysts, bankers, and IPO clients.” In his opinion, “They will find a way to weave around the rules.”
Many analysts, though, contend that the rules will result in a more informed analysis. The JOBS Act was intended to make it easier for smaller public companies to obtain research coverage. Brett Paschke, the head of equity capital markets at William Blair in Chicago, said to MarketWatch, “Research analysts have [under present rules] gotten less time and exposure to the IPO firm, and the market benefits from a more informed analyst.”
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