The partial U.S. government shutdown is slowing plans by some companies to issue stock to the public and potentially cutting off a key source of capital for the financial markets.
The shutdown, now in its fourth week, has all but darkened the Securities and Exchange Commission, the government agency that oversees the markets. Most of the SEC’s 4,400-person staff is furloughed, including lawyers and other staffers who must approve corporate paperwork for initial public offerings. This process typically takes two to three months.
Companies that have been moving toward issuing initial public offerings of stock in the coming months include such high-profile names as the ride hailing firms Uber and Lyft and the image-sharing platform Pinterest. Among the others are biotech and health sciences companies that depend on funding from the public markets that finance IPOs.
Billions of dollars are at stake for the companies as well as millions in fees for the Wall Street firms that facilitate the deals.
Brian Lane, a securities lawyer at Gibson, Dunn & Crutcher who led the SEC’s corporation finance division in the late 1990s, said some IPOs planned for spring could be delayed until fall if the shutdown persists. For larger companies with ample cash reserves, the problem is manageable, Lane said. But smaller companies that lack deep sources of funding from the private credit markets or from venture capitalists could be hurt.
James Cox, a professor of securities law at Duke University, suggested that some IPOs eyed for the spring could end up being delayed as long as into 2020.
More than 800,000 federal employees, over half of them still on the job, missed their first paycheque Friday as the closure became the longest government shutdown of any kind in U.S. history. President Donald Trump has rejected suggestions that he agree to temporarily reopen the government while negotiating with Democrats on the wall along the Mexican border that he has demanded.
Here’s a closer look at how the shutdown is hampering the SEC’s work:
Only a small SEC staff deemed essential is in place to monitor the markets and, in the agency’s words, “respond to emergency situations” involving market integrity and investor protection, including law enforcement. The SEC’s online financial reporting service for companies, known as Edgar and widely used by investors, continues to operate normally.
About 285 agency employees are still working, including around 110 in law enforcement, according to the SEC’s shutdown plan.
“Our staff continues to monitor the asset management space, track market activity, and watch for systems issues or other events that could disrupt the fair and orderly operation of the securities markets,” the SEC said in a statement.
Before the shutdown took effect late last month, the SEC had urged companies to request that paperwork for public stock offerings already in the pipeline be expedited. The agency said it approved roughly a dozen such registration statements.
SMALLER COMPANIES HURT?
For the largest companies that were planning public stock offerings, “it’s not the end of the world,” said Alan Denenberg, a corporate lawyer who heads David Polk’s office in tech-centric Northern California. Companies with deep pockets, like Uber, Lyft and Pinterest, can ride out the delay, he said. That’s in contrast to perhaps dozens of smaller biotech and health sciences companies that hoped to launch IPOs within a few months. Their viability depends on access to the public capital markets.
“You’re suddenly thrown into a tailspin,” Denenberg said.
The consequences of these companies’ delayed access to capital can affect ordinary households, he noted. There may be clinical trials for drugs or devices that the companies won’t be able to help finance, a delay that would slow the public’s access to potential breakthroughs.
OPEN SEASON FOR FRAUD?
With many SEC enforcement attorneys and staffers idled, some see warning lights flashing involving white-collar crime.
The shutdown is “essentially providing fraudsters and schemers with a free pass to swindle investors and small businesses,” said Rep. Maxine Waters, the California Democrat who now chairs the U.S. House Financial Services Committee, which oversees the securities industry.
With its depleted staff, the SEC can’t monitor the activities of the 26,000 investment firms, brokerages and stock exchanges that are registered with the agency, Waters said on the House floor recently. “Worse, the SEC is unable to hold bad actors accountable through most enforcement actions, preventing harmed investors from obtaining relief.”
Cox, the Duke University professor, doesn’t regard the problem as urgent – at least not yet.
“It’s smouldering, but it’s not flaming,” he said. A notable exception could be enforcement cases for which the statute of limitations will soon run out, thereby preventing the SEC staff from pursuing those cases, Cox noted.
In a case Tuesday, the SEC announced civil charges against a Ukrainian man and eight other individuals and companies in a scheme to profit by hacking into the Edgar computer system to steal companies’ earnings reports before their public release. They are accused of reaping $4.1 million from the scheme.
The shutdown is preventing the SEC staff from processing or ruling on the hundreds of shareholder proposals that are challenged by companies each year. With the spring annual-meeting season a few months away, this means the agency can’t determine whether such proposals can be placed on the proxy ballots that companies issue to shareholders.
Investors typically try to place proposals on proxy ballots, for consideration in a vote at annual shareholder meetings, on issues ranging from executive pay to political spending to gender discrimination.
This year, for example, an activist shareholder wants to pre-emptively block the nation’s two largest private detention companies from housing immigrant children who have been separated from their parents. The companies, CoreCivic and GEO Group, want to bar the proposal from a vote. They say they have no intention of housing separated immigrant children or their parents, but they are fighting the activist’s attempt to require them to adopt explicit policies to that effect.
The companies have asked the SEC for permission to exclude the resolution by Alex Friedmann, associate director of the Human Rights Defence Center, from the ballots.