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Insider Trading, IPOs and More Go Unpoliced in Government Shutdown

Insider Trading, IPOs and More Go Unpoliced in Government Shutdown

As the longest federal government shutdown in history drags on, President Trump is testing out a new slogan to drum up support for his border wall: “BUILD A WALL & CRIME WILL FALL!” Market participants may see some irony in the line. Whatever impact a border wall may have on crime, the shutdown it inspired is forcing a skeleton crew at the SEC to police the markets in far-from-ideal conditions. And now, as the shutdown reaches into a second month, two bold companies are considering taking themselves public while the SEC isn’t watching.

According to one estimate, the SEC is operating at just under 6 percent of its overall capacity during the shutdown, with just 110 of the agency’s 1,344 employees in the law enforcement division at work. The SEC Office of Compliance Inspections and Examinations has apparently halted investment adviser exams, too.

The effects of the shutdown, meanwhile, go beyond the SEC to include the public companies it polices. As corporate boards begin determining which shareholder proposals will be included on proxy statements, for instance, they’re facing the prospect of doing so without the SEC guidance on whether specific proposals can be excluded. As a result, activist shareholders could force votes on proposals that otherwise might have been nixed by SEC no-action letters.

A quick search of the Intelligize platform reveals that public companies are citing the shutdown as a risk factor for any number of other, specific reasons:

  • Integrated Device Technology Inc. reports that the Committee on Foreign Investment in the United States (CFIUS) has pressed paused on a review of a merger that raised national security concerns;
  • Aimmune Therapeutics, Inc. is waiting for the FDA to review its application for its biologic treatment of peanut allergy in children 4-17 years old;
  • Sentinel Energy Services mailed a proxy statement without including technically required financial statements (of a recently acquired business) in hopes that the SEC would grant its waiver request after re-opening.

And it’s not just publicly traded companies scrambling to adjust to a short-handed SEC. Companies that want to go public are finding their paths blocked. With the agency unable to process corporate registration statements, IPOs may not be feasible in the first quarter of 2019. The logjam has left some companies considering extreme measures. According to The Wall Street Journal, two biotech firms are vetting the possibility of killing some of the standard language in IPO filings. By removing the so-called delaying amendment from their registration statements, Gossamer Bio Inc. and TCR2 Therapeutics Inc. could declare the statements effective 20 days after filing them. At that point, the two companies could begin trading on an exchange despite their lack of SEC approval.

Naturally, eschewing an SEC signoff before going public makes the investing community squeamish. Bankers and exchanges—including Nasdaq, where the two biotech firm’s have planned to list their shares—have viewed the tactic with a skeptical eye. What happens if the IPO filings are later found to be insufficient? That sounds like a difficult question to untangle, but for biotech companies that need funding to keep pace with expensive research and development, they might not have enough time to wait for the executive and legislative branches to strike a deal.

The longer the shutdown goes on, the more likely it is that criminal actors and law-abiding ones alike will start taking greater chances with their behavior.

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