This Tech IPO Is the Latest to Limit Rights of Small Investors

Super voting rights are a concern.

When data center operator Switch goes public on Friday it will be the latest tech firm using special shares to limit the rights of minority investors, making it ineligible for inclusion in the S&P 500 under new rules meant to deter such practices.

The Las Vegas company, run by enigmatic founder and CEO Rob Roy, plans to sell 31.3 million shares in an initial public offer late on Thursday for between $ 14 and $ 16 a piece, which would raise nearly $ 500 million and make it the largest technology listing this year after Snap.

Underwriters closed their order book late on Wednesday and the deal was oversubscribed, according to a source close to the IPO.

Roy, who describes himself as an “inventrepreneur” and “tech futurist,” will have 68% of voting power following the IPO, thanks to a special share class providing 10 votes per share.

That will keep Switch out of the S&P 500 and other related indexes under new rules instituted by S&P Dow Jones in July after Snap sold shares without any voting rights in its $ 3.4 billion IPO earlier this year.

Rule changes enacted last month for FTSE Russell indexes, also in reaction to Snap, require new constituents of its indexes to have at least 5% of their voting rights in the hands of public shareholders.

The shares being sold in Switch’s IPO will include 4.9% of the company’s voting rights, or 5.6% if underwriters exercise an option to buy additional shares.

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In its IPO filing and a profile of Roy on the company website, Switch gives no details about what he did before founding the company in 2000 or his academic qualifications. The profile describes him as “a recognized expert in advanced end-to-end solutions for mission-critical facilities.”

A company spokesman declined to provide additional information about Roy, and he does not appear in a 38-minute video marketing the IPO.

The IPO could value Switch, which operates three data centers in Michigan and Nevada, at almost $ 4 billion.

Snap co-founder Evan Spiegel was well known to Wall Street ahead of the Snapchat-owner’s February share offer, with many investors essentially betting on his talent. With Roy less known, investors may be taking a greater risk on a company in which they will have little say.

“Investors do look at voting control as well as the price you pay. If you put so much stock in the CEO, normally he’s going to part of the sales pitch for the company,” said Ken Bertsch, Executive Director of the Council of Institutional Investors, which represents top U.S. pension funds.

As many of 15% of U.S. IPOs in recent years have used dual share classes meant to give insiders outsized voting rights, according to the Council of Institutional Investors.

Inclusion in a stock index can be an important milestone for young companies, bringing their shares into many passive funds and others that closely follow indexes like the S&P 500, a guide for trillions of dollars of capital worldwide.

Other companies excluded from major indexes under their new rules include video-streaming company Roku Inc, whose IPO last week kept 97% of voting power with insiders. Software seller Mulesoft’s IPO in February included a share class with 10 votes per share, as did Blue Apron in its June debut.

Suggesting that the tide may be turning toward sharing power with minority investors, privately-held ride-hailing company Uber on Tuesday said it would abandon a dual share class system that favored insiders including former CEO Travis Kalanick.

Responding to a shareholder lawsuit, Facebook Inc in September gave up plans for a new class of stock that was meant to be a way for Mark Zuckerberg to retain control over the company he founded while fulfilling a pledge to give away his wealth.

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Hack of U.S. securities regulator rattles investors, stirs doubts

WASHINGTON/NEW YORK (Reuters) – Wall Street’s top regulator faced questions on Thursday about its defenses against cyber criminals after admitting hackers breached its electronic database of corporate announcements and may have used it for insider trading.

The incursion at the Securities and Exchange Commission (SEC) struck at the heart of the U.S. financial system. The SEC’s EDGAR filing system is the central repository for market-moving information on corporate America with millions of filings ranging from quarterly earnings to statements on acquisitions.

Accessing documents before they are released publicly would offer hackers a lucrative opportunity to trade on that information.

The SEC said late on Wednesday that a hack occurred in 2016 but it had only discovered last month that the cyber criminals may have used the information to make illicit trades.

SEC Chairman Jay Clayton gave members of Congress a “courtesy call” about the hack late on Wednesday afternoon, said Rep. Bill Huizenga, chairman of the House subcommittee on Capital Markets, Securities, and Investment, which oversees the SEC.

”I’m glad that Jay Clayton has decided to acknowledge this and release it, warts and all,” Huizenga said.

”It’s hugely problematic and we’ve got to be serious about how we protect that information as a regulator. I’m hoping that this leads to some vast improvements and an uptick in the vigilance that all the regulators are going to have with information that’s coming to them.”

The disclosure has rattled investors’ faith in the security of their data. It comes two weeks after credit-reporting company Equifax (EFX.N) said hackers had stolen data on more than 143 million U.S. customers, and in the wake of last year’s cyber attack on SWIFT, the global bank messaging system.

It is particularly embarrassing for the SEC and its new boss Clayton, who has made tackling cyber crime one of the top enforcement issues during his tenure.

“The Chairman obviously recognizes the irony of the SEC potentially serving as the unwitting tipper in an insider trading scheme,” said John Reed Stark, a former SEC staff member and cyber expert.

The SEC has said it was investigating the source of the hack but it did not say when exactly it happened or what sort of non-public data was retrieved. The agency said the attackers had exploited a weakness in part of the EDGAR system and it had “promptly” fixed it.

CYBER SLEUTHS NEEDED

Clayton will be grilled on the incident and its aftermath at a hearing by the Senate Banking Committee on Tuesday. In particular, questions are likely about how prepared the SEC was against such an attack and why it waited until now to disclose it.

Securities industry rules require companies to disclose cyber breaches to investors and the SEC has investigated firms over whether they should have reported incidents sooner.

In July, months after the breach was detected, a congressional watchdog office warned that the Wall Street regulator was “at unnecessary risk of compromise” because of deficiencies in its information systems.

The 27-page report by the Government Accountability Office found the SEC did not always fully encrypt sensitive information, used unsupported software, failed to fully implement an intrusion detection system and made missteps in how it configured its firewalls, among other things.

It also shut down a specialized unit on cyber crimes as part of a reorganization in 2010 despite former SEC chair Mary Jo White, in office when the hack occurred, telling Reuters in 2016 that cyber security posed the biggest risk to the U.S. financial system.

“Cyber crimes have continued to spread, thrive and become more innovative. Now, more than ever, the SEC needs a dedicated and specialized corps of cyber sleuths to track down and deter hackers,” said Stark, currently president of a cyber consulting firm.

The SEC has scored some victories in tackling cyber criminals. In 2015, the commission unmasked a ring of stock traders and hackers who had accessed company press releases from distributors Marketwire, PR Newswire and Business Wire before the information was made public to make $ 100 million in illegal profits.

Writing by Lisa Lambert; Editing by Carmel Crimmins and Nick Zieminski

Our Standards:The Thomson Reuters Trust Principles.

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