Senate mulls an express lane for IPOs

The Senate is considering changes to a House bill aimed at helping companies planning IPOs

WASHINGTON (CNNMoney) -- The Senate will vote on Tuesday on changes to a bill that would let more companies go public by bypassing audits and disclosures now required for investors

Earlier this month, the House overwhelmingly passed a bill to roll back some rules that the Securities and Exchange Commission enforces on small and medium companies attempting to make an initial public offering. The Obama administration supported the bill.

But the measure sparked concerned letters from investor groups, unions, consumer groups and even the head of U.S. Securities and Exchange Commission. All of them say the House bill could open the door for more failed IPOs and investor fraud.

"We must balance our responsibility to facilitate capital formation with our obligation to protect investors and our markets," wrote SEC Chairman Mary Schapiro in a letter to senators last week. "Too often, investors are the target of fraudulent schemes disguised as investment opportunities."

On Friday, the California Public Employees' Retirement System became the latest group to call for changes to the bill. The bill could "either eliminate or undermine important investor protections," wrote Janine Guillot, chief operating investment officer for CalPERS, the nation's largest public pension fund.

The House bill would relax SEC rules for small and medium-sized companies with less than $1 billion in gross revenue seeking to go public. The measure gives them up to five years, or until revenue tops $1 billion, to supply an independent audit and certain investor disclosures.

Critics say $1 billion is too high a threshold -- some 80% of firms going public would be able to bypass disclosures.

The House bill would also exempt firms from nonbinding shareholder votes on executive pay and benefits packages, which just came as part of the Wall Street reform law. In the aftermath of the financial crisis, the law made it tougher for CEOs to reap bonuses tied to soaring stock prices -- particularly when the company is over-leveraged and making risky bets.

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Critics, including the Council of Institutional Investors, say easing the rules would apply to far too many companies and could make investors wary of investing in them.

"A company (with a billion in revenues) has the resources to comply with disclosures," said Jeff Mahoney, general counsel to the Council of Institutional Investors.

The House bill would also allow companies to solicit investors -- including the use of advertisements -- when going public, which is currently prohibited. And it would allow them to raise money from larger numbers of small, less sophisticated investors.

Barbara Roper of the Consumer Federation of America warned the provision would make it easier for companies to take advantage of seniors, luring them to sink their retirement savings into an IPO.

"A retiree who has that nest egg isn't necessarily a sophisticated investor and shouldn't be speculating on private offerings," Roper said.

The House bill would also allow what's called "crowd funding," allowing firms to bypass regulations to raise money from large pools of small investors by directly soliciting them over the Internet. Critics are concerned about the potential for fraud.

A group of Democratic lawmakers in the Senate wants to weaken the House bill by doing such things as reducing the number of companies able to bypass disclosures.

"The strength of our financial markets has always been confidence by investors that they have adequate information," said Sen. Jack Reed of Rhode Island. "Without that, the markets are less markets and more casinos."

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Reed and a few other Democrats want larger companies to file disclosures and do audits, lowering the threshold for companies to qualify as an "emerging growth company" to those with less than $350 million in gross revenue.

They'd also give the SEC power to set rules governing when firms advertise directly to less sophisticated investors. And they'd require crowd funding to go through regulated Internet portals and force the larger offerings to disclose financial information to investors.

A spokesman for Senate Minority Leader Mitch McConnell said Monday he and other Republicans oppose proposed changes to weaken the House bill. 

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