May Staffers Participate in IPOs? | A Question of Ethics
Q. I am a House staffer and have been offered a chance to participate in the initial public offering of a well-known company that is about to go public. My position as a House staffer had no role at all in the opportunity becoming available to me. In fact, the person who invited me to participate did not even know that I work for the House of Representatives. I presume this means that it is OK for me to participate. However, another staffer in our office told me I’m wrong. I really want to do it, so please don’t tell me the rules prevent it.
A. You know the adage that it’s better to beg for forgiveness than ask for permission? In this case, ignore it. Here’s why.
You’ve probably heard of the Stop Trading on Congressional Knowledge Act, better known as the STOCK Act. It was passed in April 2012, amid concern that some members and staffers might be profiting on investments made based on material information learned through their work in Congress.
The act’s most discussed provision affirms that all members and staffers are subject to the same insider trading prohibitions as those that govern members of the general public, meaning they may not make stock trades based on material inside information.
Before the STOCK Act, there had been some speculation as to whether there might be an exception to the insider trading restrictions for members and staffers, and the STOCK Act ended that speculation.
A lesser-known aspect of the STOCK Act addresses initial public offerings. IPOs are essentially offerings to purchase shares in a company for the first time immediately before the shares become available for sale to the general public. In some cases, the opportunity to participate in an IPO is highly coveted, as the share price of newly public companies can sometimes quickly spike above the IPO price once they go public.
The STOCK Act imposes strict limits on the extent to which members and staffers may participate in IPOs. Specifically, members and House staffers may not “purchase securities that are the subject of an initial public offering … in any manner other than is available to members of the public generally.”
But, what does it mean to participate in a “manner” that is available to the public generally? You could argue, perhaps, that your circumstances meet this standard because your chance to participate in the IPO didn’t come to you by virtue of your employment by the House. If the idea is to put you on equal footing with other members of the general public, you could argue, you should be able to participate in IPOs that become available for reasons other than your House employment, just like other members of the public may participate in IPOs that become available to them.
However, a memorandum issued last week by the House Ethics Committee should give you pause. Citing the substantial recent attention for IPOs of companies like Twitter, which took place last week, the memorandum affirms the prohibition against participating in an IPO in a manner other than is available to the public generally. “IPO participation,” the memorandum adds, “is normally not available to the general public.”
Does this mean that it’s never all right for members and staffers to participate in IPOs? Presumably not. If participation were always forbidden, the committee could have said so. But the memorandum does imply that, because of the inherent exclusivity of IPOs, the circumstances may be rare in which members and staffers may participate.
The memorandum urges members and staffers to contact the committee in advance of purchasing shares in an IPO to determine whether the purchase would be permissible under the law. If that were not clear enough, the terms “in advance of your purchase” are in bold italics.
Moreover, the committee’s memorandum doesn’t provide any examples of circumstances in which it would be permissible for members and staff to participate in an IPO. When issuing guidance about other rules, the committee often provides illustrative examples — both of conduct that the rules forbid and conduct that the rules allow. The absence of examples here could mean that the committee views the analysis as particularly fact-specific, and could also be a sign of the committee’s reluctance to approve IPO participation.
In short, since the chance of forgiveness may be low, in this case you’d better go for permission.