Co-authored by Michelle S. McIntosh.

Last week, members of Congress sent letters to the Securities and Exchange Commission, encouraging them to reconsider rules related to the initial public offering (IPO) process, and to adopt rules relating to conflict minerals and resource extraction.

IPO Process

In a June 19 letter to the SEC, the House Committee on Oversight and Government Reform (the Committee) put pressure on the SEC to take a closer look at the IPO process and consider whether current rules governing the IPO process suffer “substantial flaws.” The Committee expressed concern that underwriters are able to “dictate” the price of an IPO “while only indirectly considering market supply-and-demand in their price evaluation.”

The Committee also expressed concern that underwriters’ ability to provide information to institutional clients that is not available to the general public disadvantages individual investors. The letter cites the Facebook IPO as an example of a situation where certain institutional investors received information not available to the general public, resulting in losses to individual investors. The Committee asked the SEC to consider the communications restrictions imposed by the Securities Act of 1933 and the rules thereunder and whether these rules provide institutional investors with an informational advantage.

The letter also urges consideration of market-based IPO pricing, noting that shares are frequently undervalued in IPOs while substantial underwriting fees are imposed, to the disadvantage of new public companies. The Committee stated that this process “places a direct drag on economic growth” and that a market-based approach would lower the cost of capital formation and eventually increase the size of domestic capital markets. The letter suggests a “Dutch Auction” approach to IPO pricing, where bids determine the price the market is willing to pay for shares, as a market-based alternative to the current process.

The Committee requested information collected by the SEC relating to IPO pricing and allocation of shares and a response to the numerous questions posed throughout the letter by July 3.

To view the complete text of the letter, click here.

Conflict Minerals

In a June 22 letter to the SEC, 58 members of Congress urged the SEC to vote on final rules to implement Sections 1502 and 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which require public companies to make disclosures relating to the use of conflict minerals and payments for extraction of resources. The SEC did not meet the April 17, 2011 statutory deadline for adoption of final rules, and the comment period for the proposed rules closed over one year ago. These Congressmen expressed concern that a delay in rulemaking would create a risk to investors and undermine efforts to create transparency in the mining and natural resource extraction industries. They requested an SEC vote on final rules by July 1 or a response by June 29 setting a definitive date for the vote.

To view the complete text of the letter, click here.