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Facebook IPO, why it's different from the dotcom ere $FB -- Blodget

Spitzer forced an industry-wide settlement in which the involvement of research analysts in IPOs was pared back and the "Chinese Wall" between research and banking was strengthened.

This industry reform had several consequences, some of which were positive and some of which were negative.

On the positive side, the reforms removed some stress for analysts. Once analysts were no longer evaluated in part on banking business, they focused more on serving institutional investor clients and researching already public companies. And that's unequivocally a good thing.

On the negative side, it became harder for companies to go public...because it turned out that having analysts involved in the screening, positioning, and marketing of deals and then providing follow-on research coverage of small companies made the whole IPO process work better. So that, arguably, was a bad thing.

Read more: Henry Blodget / businessinsider

Before Facebook, the assumption was that every communication from an underwriter's research analyst about an IPO candidate would be positive. Whatever the analyst had to say, in other words, could be construed as "hyping" the stock and making it easier to sell.

n their desire to protect unsophisticated investors from this "hyping" of IPOs, regulators decreed that underwriter research analysts would not be allowed to publish any research on an IPO--or publish anything in print--until a certain amount of time after the deal.

Back in the 1990s, this "quiet period" was 25 days. After the Spitzer reforms, it was lengthened to 40 days.

But, more importantly, the underwriter research analysts were still allowed to do three things to help the firm's big institutional investors:

Talk to company management about the business

Generate estimates for IPO companies with management's help

Discuss these estimates and their opinions verbally with big institutional investors

The idea was that institutional investors would be sophisticated enough to evaluate the analysts' estimates and opinions, instead of just regarding them as "hype" and mindlessly placing orders.

In the view of the regulators, in other words, the institutions did not need to be "protected" from the enthusiasm of research analysts. So they could talk to the analysts and learn all they could from them (which in most cases was a lot). Individual investors, meanwhile, were assumed to be clueless and gullible and therefore in need of protection from analyst enthusiasm.


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