Could mouthy politicians prolong the GM sale if they’re not careful?

Chris Moody Contributor
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The federal government has taken great pains to tout the benefits of its $50 billion bailout of General Motors, but some officials may need to keep quiet about the company’s future success if they want the Securities and Exchange Commission to approve a sale to new investors any time soon.

GM filed an official prospectus report with the SEC Wednesday, which begins the process of selling the company’s stock, a process known as an initial public offering (IPO). The federal government currently owns 60.8 percent of the company, and the prospective contains all of the relevant information a potential investor needs to know before making a decision about whether they want to take the company off the government’s hands.

Under SEC rules, GM must undergo a “quiet period” in which those with inside knowledge of the sale cannot publicize or promote the company beyond what GM has already filed in the prospectus. The rule is in place to ensure that no one gets special information about the company’s sale beyond what all investors have access to.

Translation: All the talk from public officials that GM is going to make taxpayers big money stops now. (Yes, even from you, Vice President Joe Biden).

If not, the SEC could prolong the process of getting the auto company off the public dole.

This is all standard procedure for any company filing an IPO, but because the U.S. government is involved, to the tune of $50 billion in taxpayer money, the situation facing GM is, in the words of former SEC official Peter J. Romeo, “unique.”

“The GM deal is so unique that it’s hard to avoid attention to it and whatever you say is going to be picked up by the papers,” said Romeo, now a partner at Hogan Lovells, an international law firm. “Neither [Treasury Secretary Timothy Geithner] nor anyone else should be trying to promote the offering, in effect, touting it as something investors ought to buy. That’s the whole purpose of the quiet period limitations.”

Romeo added that he had not heard of a previous case in which the selling stockholders had provoked an SEC investigation.

Because there are no hard rules that explicitly define what a “breach” in the quiet period explicitly means, the SEC judges whether or not to delay an IPO on a case by case basis. In 2004, Google was forced to postpone their public offering after the tech company’s founders gave too much information about the company in a Playboy Magazine interview. A similar thing happened to when its Chief Executive Marc Benioff gave a rather informative interview to The New York Times the same year. Business insiders call the practice, “gun shooting.”

For example, when GM CEO Ed Whitacre Jr. says things like “this company is going to make a lot of money” right around the same time the IPO is filed, there is a chance the SEC might notice. (Whitacre announced earlier this month that he would retire from his post on September 1.)
For GM, the risk of gun shooting is arguably higher than in most cases. While most companies may only have to keep a few insiders accountable, GM faces an extended waiting period as a result of mouthy government officials and leaks. While the federal government is not directly making the offering, if an official leaks a bit of information that is not in the original prospectus, the SEC could force the company to wait even longer before it is enabled to lose “Government Motors” label.

And if anyone is under the impression that the SEC is going to give GM a pass because it is mostly owned by the government, think again.

“The government’s role wouldn’t make any difference to the SEC, believe me,” Romeo said. “If there is something they think is amiss, they’d go after it as if the government had no association with it. It just wouldn’t make a difference.”

John Heine, SEC deputy director of office of public affairs, declined to comment on the subject since the commission does not discuss individual cases.

In order to pay back GM’s stakeholders, the company must raise $70 billion through the IPO process.

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