Friday, September 16, 2011

Is It Time to Mandate SEC Filings by Companies Wishing to Receive Taxpayer Guaranteed Loans?

A Form S-1 is a document a company must file with the Securities and Exchange Commission before it company may offer securities for sale, either equity securities in an IPO or the issuance of public debt. While the online form is only 8 pages long, in reality an S-1 filing can run to hundreds of pages once it is filled out as it must cover several areas of interest to potential investors. This includes, among other things, a description of the company's business, its history, relevant risk factors, the use of the offering proceeds, capitalization and management's discussion and analysis of the business and the company's financial statements. These will include and opinion by an independent auditor as to whether the company's financial statements fairly represent the performance of the business and comply with Generally Accepted Accounting Principals (GAAP) as well as any qualifications to the opinion. 

One of the potential qualifications is what is known as a "going concern" clause which is the audit firm's way of saying "assuming this company remains in business." By inserting that clause in their opinion they are saying that that may not be a safe assumption.  Apparently the auditor's opinion for Solyndra contained this clause and yet the Obama administration pressured the Department of Energy to rush through an approval of a $535 million taxpayer guaranteed loan, despite the Bush administration having turned it down only a couple of months before. There was even concern expressed by DOE analysts that the company was burning cash at such a rate that it would run out by this month. And sure enough, the company filed for bankruptcy, laid off all of its workers and closed its doors on August 31.

If a S-1 was ever filed for this company, I haven't found it and the reason is that the company didn't have to file one because it didn't intend to go public anytime soon. It was entirely funded by venture capital up until the time of the loan.

Yet here I am, an involuntary investor in a bankrupt company, like all the rest of the tax-paying public. I believe that an application for a government loan, guaranteed by the taxpayers, should require the filing of an S-1 or similar disclosure should be made in all cases and that a public comment period of not less than 90 days be mandated before the loan can be made. If the tax-payers can be put on the hook for the loan then they have a right to know what their government is getting them into. The comment period would allow an opprtunity for a crowd-sourced analysis of the company, the soundness of its business case and its financial viability. As long as the government is going to be in the venture capital business and picking winners and losere, and I don't think it should be, this would be a huge leap in transparency and accountability where government and private business intersect. 

Update:  I just went back to Edgar and searched again. I did find an S-1 for Solyndra. I think I probably searched as "Solyndra Corporation" the first time around and it is Solyndra, Inc. Sometimes less is better when searching. In any case, the financials are from pre-revenue 12/31/2006 and 2007 then nine months ended 9/27/2008 and 10/3/2009 and are every bit as ugly as any financial statements I've ever seen, and I do look at a lot of them.  If the company can't get any takers for an IPO, that should be all you need to know about the wisdom of granting a loan. If the market won't touch it, it's sheer idiocy to lend the company money on any terms.
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