Anthony Bolante/ReutersAndrew Mason, chief of Groupon.

Groupon’s initial public offering is about to hit some very rough turbulence.

The reason is that the Securities and Exchange Commission may force a postponement of the offering. The problem arises from an e-mail apparently sent last week by Groupon’s chief executive, Andrew Mason, to thousands of Groupon employees.

In the e-mail, as reported by Kara Swisher at All Things D, Andrew Mason details his frustration at “getting the [expletive] kicked out of us in the press”. He disputes media reports about the company and defends Groupon’s proposed accounting metric of “adjusted consolidated segment operating income,” which excludes types of marketing expenses, currently about 20 percent of Groupon’s revenue. Mr. Mason then makes a spirited defense of company, stating that Groupon’s businesses are doing better than its competitors and seeing “unprecedented growth”.

Unfortunately, Groupon is in the quiet period for its I.P.O. Under longstanding legal rules, once Groupon files its prospectus with the S.E.C., it is largely prohibited from sending out written communications to the public promoting its stock. These communication rules, which are quite intricate, dictate what a company can and cannot say once its I.P.O. document, known as a registration statement, is filed with the S.E.C. The guiding light is that a company should not be allowed to condition the market by hyping its stock through written materials that contain information not otherwise already in the registration statement or otherwise filed with the S.E.C. Instead, all of this material should be concentrated in one document, the I.P.O. prospectus, which is reviewed by the S.E.C.

Companies can easily be tripped up by these rules. In 2004 Google came close to delaying its I.P.O. because of an interview its two founders gave to Playboy. The S.E.C. investigated and did force the company to file the article as part of its I.P.O. document.

More tellingly, the S.E.C. forced the delay of an I.P.O. by Salesforce.com in 2004 because an extensive interview given by the company’s chief executive to The New York Times while the company was in the quiet period. The difference appears to be that Salesforce was in the quiet period while Google arguably was not.

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The communication rules were reformed in 2005 to allow a significant number of exceptions to the quiet period. None of these appear to be met here, however. Thus, since Groupon is also in the quiet period, the memo issued by Andrew Mason would likely be viewed by the S.E.C. as unduly conditioning the market but for one important fact. It was not circulated publicly but rather solely to employees.

If past precedent is any guide, this will not save Groupon.

The reason is the Wired Ventures failed I.P.O. Wired filed for an I.PO. in 1996. Remarkably similar to what Andrew Mason did, Wired’s chief executive sent out an e-mail to Wired’s 334 employees criticizing “shoddy, if not malicious” stories in the media about the company. He then asserted that the quiet period hampered his ability to respond but went on to detail why Wired was a great company. In the wake of the e-mail, the company withdrew its I.P.O. filing.

The case highlights that mass communications to employees about the company’s prospects during the quiet period are likely to be viewed by the S.E.C. as impermissible conditioning of the market. It is communication to too many people and the agency considers these communications as too hazardous. There is too much potential for this information to seep out into the public and unduly condition the market. Moreover, this is particularly true in the case of Groupon, which is under the spotlight and the potential for leaks of the memo was enormous. Of course, if the company deliberately leaked the memo this would make an even stronger case. Groupon’s I.P.O, lawyers would never have let this memo go out if they had the opportunity to stop it.

Unfortunately, as Connie Loizos wrote on PE Hub, it appears that these lawyers are losing control of this process. Groupon’s public relations representatives are reaching out to media and referring to the memorandum in discussions as Groupon’s view of the world.

It appears likely that the S.E.C. will investigate this and may take some action that could delay the Groupon I.P.O. Of course, this puts the agency in a difficult position, because while it wants to enforce its rules, it also does not want to be viewed as hampering commerce.

The communication rules even after being reformed are outdated and overly restrictive. They are also convoluted and hard to understand. For example, if Mr. Mason had merely broadcast this e-mail over a loudspeaker to his employees it wouldn’t have been a problem as oral communication is largely exempted so long as it is not recorded for playback.

But still these are the rules. Andrew Mason appears to have crossed them.

Article source: http://feeds.nytimes.com/click.phdo?i=e2f9c997dd250118c5762b4d5c2f4dca