Groupon IPOLoopholes in SEC Disclosure Requirements May Harm Investors

Groupon Inc. (GRPN), which went public last November, has recently disclosed that it has identified a "material weakness" in its internal controls over financial reporting. Due to this and other changes, the stock is now being traded at around 44% less than it was after the first day of trading.

The issue that this author raises regarding what he refers to as "sandbagging" investors, is the legal loophole in the Sarbanes Oxley disclosure requirements. Essentially, the problem is that there is no requirement to disclose a control weakness within a company's IPO prospectus.

In fact, there is no obligation to disclose the problem until the company files its first quarterly or annual report as a public company. In fact, Groupon has recently restated its financial report to correct errors in the way it reported revenue, which slashed 2010 sales from $713.4 million to $312.9 million.

These potential failures to disclose could stem from the fact that at least two of the relevant sections of Sarbanes Oxley Act that are related to companies' internal controls, those systems and processes companies are supposed to have in place in order to ensure that their reports are accurate, apply only to companies that are public already, not ones that have merely registered for their IPOs.

As related to Groupon in particular, at least some experts saw this one coming:

It is absolutely ludicrous to think that Groupon is anywhere close to having an effective set of internal controls over financial reporting, having done 17 acquisitions in a little over a year[] When a company expands to 45 countries, grows merchants from 212 to 78,466, and expands its employee base from 37 to 9,625 in only two years, there is little doubt that internal controls are not working somewhere.

Thus, the author of the Bloomberg piece concludes, the best solution for investors who are not insiders is to not invest in companies that have just gone public.

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