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Issuers struggle with pre-IPO criticism

NEW YORK (Dow Jones) -- For companies going public, silence isn't always golden.

With the growth of independent stock research and renewed interest in initial public offerings, more companies planning to sell stock for the first time are finding themselves the subject of research reports.

When these reports are critical, the IPO candidates can't rebut, because securities laws prohibit them from making statements about their business or prospects outside of the stock-offering documents filed with the Securities and Exchange Commission.

It's a marked change from the past, when Wall Street firms, playing the dual role of underwriter and researcher, held off on issuing investment research until after the so-called quiet period ended several weeks following the IPO. And when research was issued, it was usually very positive.

This close relationship between research and banking has been broken up in recent years by regulators. That spawned a new breed of small, independent research shops, which have been much quicker to pan a company than their Wall Street counterparts.

In the past few months, companies like software seller Salesforce.com Inc. (NYSE: CRM), online retailer Blue Nile Inc. (Nasdaq: NILE) and Internet search giant Google Inc. all had negative ratings from some research firms even before a single share had been offered for sale.

Companies' desire to speak out in an age when research is coming more quickly may be enough of an impetus for regulators to find a way to allow them to respond in some fashion and still follow the law, lawyers say.

"Investment information is not measured in days anymore, it's measured in hours at best," said Robert S. Matlin, a partner at Thelen Reid & Priest LLP in New York, also co-chairman of the private equity and venture capital practice group.

Of course, there's a reason the law likes to keep issuing companies quiet. The Securities Act of 1933, where the quiet period was born, restricted companies from conditioning the market in any way to help drum up interest in a sale. That was designed to protect the buyer, who had previously born all the risk in what essentially had been a "buyer beware" market for stock sales.

But it has also hamstrung the seller. For example, even if information in a research report is wrong or misleading, most lawyers say they would advise the issuing company to remain silent.

"If someone comes out with a negative report, it would be very, very dangerous for a company in registration to go ahead and contest it," said Gregg Berman, a corporate-finance partner at law firm Fulbright & Jaworski LLP in New York.

This is especially true with financial projections. "If an independent analyst says, 'We went ahead and looked at this company and think it's going to make 15 cents,' the company's not going to say we're going to make 18 cents," Berman said. "To me that would be inconceivable."

Companies do have some options, chief among them using their own IPO offering documents to answer back. That's what Google (Nasdaq: GOOG) did to try to mute criticism last month that it had sprung an eleventh-hour surprise on investors by announcing that it may have violated securities laws when it issued shares to employees and other investors before the IPO.

Google first disclosed in April the possibility that it may have violated securities law by issuing shares that weren't properly registered with state and federal regulators. But, talk concerning the shares accelerated in August when Google formally filed an offer to rescind the shares.

So, Google amended its IPO filings, telling investors that the rescission offer was "not an unanticipated development" and that such an offer was "commonly made by companies" like Google.

Still, issuing companies have to be careful they can prove any statements they make in their IPO filings, like the prospectus for the deal, Berman said.

"A prospectus is a liability document and you have to have justification for everything you put in there -- justification and backup," he said.

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