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In Wake of Groupon Issues, Critics Wary of JOBS Act
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A little-noticed provision in the new JOBS Act would allow companies to iron out disagreements with regulators behind closed doors before they go public—a provision that might have prevented investors from finding out about Groupon Inc.'s GRPN -16.92% early accounting questions until after they had been resolved.


A little-noticed JOBS Act provision that would allow firms to privately iron out issues with regulators prior to an IPO is drawing flak after Groupon's problems, Mike Rapoport reports on Markets Hub. Photo: Mark Wilson/Getty Images.

The provision, part of the bill passed by Congress and expected to be signed by President Barack Obama this week, would enable companies to submit confidential drafts of their initial-public-offering documents to the Securities and Exchange Commission before they file publicly.

Critics say that measure would allow a company like Groupon, which had well-publicized disagreements with the SEC over its accounting last year, to resolve such issues under the radar, without investors learning of them until later although still before any IPO.

The provision is getting increased attention in the wake of Groupon's disclosure of further accounting problems. The company, which offers discounted deals to consumers, said Friday it was revising fourth-quarter revenue downward and that it had a material weakness in its internal controls, the policies and procedures designed to avoid financial error.

"I find it amazing that Congress would allow any firm to work behind closed doors on any accounting or auditing issue," said J. Edward Ketz, an associate professor of accounting at Penn State University. "We learned a long time ago that sunshine is the best antiseptic."

A spokesman for Groupon declined to comment on the JOBS Act provision.

Supporters say the provision is needed to help small companies, and they insist there was no intent to allow a company like Groupon to duck investor scrutiny.

"Nothing's under the radar. Nobody's pulling anything over anyone's eyes," said Kate Mitchell, who chaired a task force organized by the Obama administration that made many of the recommendations making it easier for companies to file publicly that are in the JOBS Act, which stands for "Jumpstart Our Business Startups."

"We don't want poor-quality IPOs out there," she said.

Groupon said Friday after the market close that its executives failed to set aside enough money for customer refunds. Jason Child, Groupon's chief financial officer, said when the announcement was made that the company remains "confident in the fundamentals of our business."

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Andrew Mason, founder and CEO of Groupon, attending the company's IPO last year.

Groupon hasn't been accused of any wrongdoing.

The company went public in November, raising $805 million. In February, it reported a loss of $37 million for its fourth quarter in its first earnings report as a public company. The accounting changes announced Friday will reduce revenue for the quarter by $14.3 million and widen Groupon's loss by $22.6 million, or four cents a share. Shares fell about 6% in after-hours trading Friday to $17.29.

The JOBS Act eases a variety of accounting and disclosure rules for "emerging growth companies"—those with less than $1 billion in annual revenue and $700 million in market capitalization that have been public for fewer than five years.

Under the confidential-filing provision, emerging growth companies could file a first-draft version of their registration documents with the SEC without making them public immediately. Those confidential documents would have to be publicly released 21 days before the company's "road show" in which it tries to persuade prospective large investors to buy its stock. The documents would be exempt from any Freedom of Information Act requests.

The provision's supporters have indicated it would allow young companies to avoid disclosing potentially sensitive information to competitors and other parties early in the IPO process.

Ms. Mitchell, a managing director of Scale Venture Partners, said the need to disclose sensitive data is "a big disincentive" for companies seeking to go public—especially as the majority of companies that file ultimately decide not to do so.

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Joel Trotter, an attorney from Latham & Watkins who was on the task force, said the 21-day provision ensures that investors would find out about any such situations well before an IPO happens. "Three weeks is an extremely long time in assessing information relevant to an investment decision," he said.

Backers of the jobs bill said the SEC could write rules requiring companies to disclose the contents of their confidential filings when they register publicly with the SEC, which is normally well before they conduct such road shows.

An SEC spokesman couldn't be reached for comment.

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Rep. Eric Cantor supports the act.

Task-force members acknowledge that Groupon would have been able to take advantage of such a provision before it filed to go public last year. At the time, the company was under $1 billion in annual revenue, though it has since surpassed that level and currently wouldn't enjoy the bill's protections.

Groupon had to change its accounting twice before the IPO in response to SEC concerns, under public scrutiny.

The company initially used an unusual metric called "adjusted consolidated segment operating income," which excluded its marketing costs to land new subscribers. That enabled the company to show a profit even though it was generating losses under standard accounting rules. Groupon later scaled back its references to that measure after the SEC raised questions about it.

Before its IPO, Groupon also revised the way it booked revenue from a gross figure to a net figure. Initially, the company counted as revenue all the money it took in from its daily-deal offers, but it changed that to deduct the portion of that amount that it shares with merchants. That slashed the company's reported 2010 revenue from $713.4 million to $312.9 million.

Plaintiffs lawyers pounced on the Groupon news on Friday, issuing releases within hours saying they were examining the situation.