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AUGUST 19, 2004
By Paula Dwyer The SEC Could Still Slap Google Questionable actions, such as unregistered shares and that Playboy interview, may yet prompt the watchdog to pounce Google has received the green light for its initial stock offering -- but not without ruffling a few feathers at the Securities & Exchange Commission, which oversees share offerings. The SEC's job is to make sure that companies disclose all the information investors need to make smart decisions. It's not that SEC officials were ever against Google's (GOOG ) iconoclastic IPO. Sure, the Dutch auction flouted decades of tradition by letting individual investors, not Wall Street's investment bankers, determine the share price and their distribution. But Google's unorthodox offering -- and its goal of favoring less sophisticated individual investors over institutions such as mutual funds -- forced the securities regulators to intensify their scrutiny. HAVING IT BOTH WAYS. Google hasn't completely passed the SEC's white-glove test just yet. The first mistake was failing to register some 23 million shares that it had awarded to employees and consultants between September, 2001, and July, 2004. The company appears to have rationalized that because the shares were distributed to employees and selected suppliers under a stock-option plan and not to the general public it therefore didn't have to register with the SEC or file quarterly financial statements. In its explanation of what happened, Google appears to acknowledge that it knew, by September, 2002, that it was crossing the line between a perfectly legal private placement and a public offering. "We considered ceasing granting options and shares to service providers. However, we determined that this would be detrimental to our development, as equity compensation was an essential ingredient to building our company," says an Aug. 18 filing with the SEC. "We also considered becoming a reporting company for the purpose of federal securities laws. We determined that this too would be contrary to the best interests of our stockholders." In other words, it appears that Google wanted to have its cake and eat it, too. It wanted to give stock options to employees and suppliers, but it didn't want the burden of disclosing to those shareholders important details, such as audited financial statements. According to one SEC official, "This excuse doesn't sit well over here." FINE, THEN DANDY? To fix the problem, Google says it will offer to buy back its shares from 1,406 early shareholders, at a cost of $26 million. But Google isn't likely to have to pay anything for its mistake: Most shareholders are likely to refuse the offer, which comes to less than $3 per share, now that the IPO is likely to create a market for their shares at almost 30 times that price, since late on August 18, Google announced a clearing price of $85 a share for its IPO. The SEC, itself under a harsh spotlight, has begun an informal inquiry into the matter, Google says, as have California regulators. Watch for the SEC to bring an administrative action and impose a penalty that, for Google, may amount to lunch money. But SEC enforcement officials are likely to argue the symbolic value of making Google pay for its errant ways -- and the importance of sending a signal to other companies. Google's second potential misstep was an Apr. 22, 2004, Playboy interview by co-founders Larry Page and Sergey Brin. While this contretemps seems less problematic legally, it could be a lot more costly to fix. FOR THE RECORD. The interview hit the stands with the magazine's September issue, just as the share-bidding part of the IPO was in full swing -- and as Google was supposed to be in its so-called "quiet period." That's the interval between the filing of a registration statement with the SEC and when the agency declares the registration valid. During that time, company officials are supposed to keep mum so as not to appear to be hyping their company's stock. In the Aug. 18 SEC filing, Google insists it did not violate the rules, which even SEC officials admit are vague. For one thing, the interview took place one week before the company announced that it planned an IPO. Moreover, Page and Brin canceled a second interview once the IPO was announced, and they had no control over when Playboy published the story. However, the SEC's Corporation Finance Div. was nonplussed. It demanded that Google file the Playboy interview in its entirety, correct a few minor misstatements in it, and disclose to potential investors that it may have violated the law. Why the harsh treatment? The SEC isn't saying, but David Martin, who once headed the division, says the episode "may have been the straw that broke the camel's back." To make sure potential investors weren't hurt, the SEC staff bent over backwards by requiring that Google comply with the letter and spirit of disclosure laws, and then let the offering proceed. "HARD QUESTIONS." Case closed? Maybe not. It's the Enforcement Div.'s job, not Corporation Finance's, to determine motive. And SEC enforcement lawyers will now scrutinize the facts surrounding the Playboy interview and ask, for example, if Page and Brin granted the interview knowing they would soon reveal their intent to do an IPO, and knowing that the interview would appear during the offering itself. Page and Brin "probably knew CorpFin wouldn't slow the offering down," says Martin, "but Enforcement's job is to figure out if there was bad intent, so they'll take their time and ask a bunch of hard questions." The bigger problem with the Playboy interview is the potential cost of an enforcement action. The SEC could try to force Google to repurchase all the IPO shares, plus pay interest, for up to one year following the violation date. Needless to say, Google says it will "contest vigorously" any SEC attempt to bring such a case. But the problems for Google's star-crossed IPO may be far from over.  Dwyer is a senior writer in BusinessWeek's Washington bureau
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