Maybe President Barack Obama should have bought shares in Groupon’s IPO.
If he had, he would understand what some Groupon investors may be feeling as he gets ready this week to sign a new piece of legislation to promote startups. Had he purchased $10,000 worth of shares on the open market on the first day of public trading for Groupon, the online coupon company based in his hometown of Chicago, he would have lost a good chunk of his investment, putting him in the red by almost $4,100 today.
That means he would have lost about 41 percent of his investment in Groupon in just five months, in a period when the Nasdaq was up some 16 percent. All the while, Groupon has faced nagging questions about accounting irregularities and continued losses. This is despite the fact that its co-founder Eric Lefkofsky had publicly hyped the stock — against Securities and Exchange Commission rules — saying that “Groupon is going to be wildly profitable.”
So Obama may want to weigh the feelings of Groupon’s investors as he sits down Thursday to put his signature on the Jumpstart Our Business Startups Act. That legislation is intended to help startups raise capital and go public but may also lead to many more money-losing Groupon-like IPOs.
The measure, known as the JOBS Act, is a well-intentioned bill with bipartisan support aimed at making it easier for small businesses to find investors early and to continue to grow in the public markets by lowering some of the bureaucratic barriers. Its goal is noble: Startups and small businesses are the lifeblood of our economy, and it is hard to argue with helping entrepreneurs build businesses and hire employees.
However, for the sake of job creation, the legislation dismantles some of the most basic protections for the most susceptible investors apt to be drawn into get-rich-quick scams and too-good-to-be-true investment “opportunities.”
Many companies slightly smaller than Groupon stand to benefit — potentially at investors’ expense. One part of the JOBS Act applies to companies with less than $1 billion in revenue. Groupon had $1.6 billion in revenue in 2011.
But pretend for a moment that the company decided to go public while it had less than a $1 billion in annual revenue: If the new law was in place before its IPO, it is unlikely the public would have found out in time about a series of questionable accounting gimmicks and metrics that the company had hoped to employ to bolster its numbers for investors. The SEC pressed the company to change filings, and the revisions had the effect of slashing the company’s revenues in half.