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Tuesday, May 1, 2012

Guitar-Maker Fender as an Emerging Growth Company Under the JOBS Act: Out of Tune?

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 Under the new JOBS Act, the regulation-relaxing law aimed at spurring initial public offerings by “emerging growth companies,” the venerable guitar-maker Fender Musical Instruments Corp. would qualify as one such “EGC.”

To the ears of some veterans in the world of accounting and investing, that tune hits a discordant note.

Those critics look askance at firms such as Fender--66 years old and with a history of buying up smaller firms--being able to avail themselves of the benefits of the new law. And they speculate that other, similar companies may play from the same score, to the detriment of investor protection.

“This highlights how this legislation will apply to thousands of companies, even large old companies like Fender, who are anything but an ‘emerging growth company,’ “ Lynn Turner, former chief accountant at the Securities and Exchange Commission, told me recently. “You might as well be saying something is black when it is in fact white.”

The JOBS Act (Jumpstart Our Business Startups) defines a firm in the scope of the law as one with less than $1 billion in annual revenue and a public float of less than $700 million. Scottsdale-based Fender, founded in California in 1946 by electric guitar designer Leo Fender, reportedly had net sales of $700 million in its 2011 fiscal year. Fender, the company, is also famous for its amplifiers.

Sen. Jack Reed (D-R.I.) presented a Senate amendment to the IPO “on-ramp” bill that called for a $350 million annual revenue cap for an emerging growth company. The amendment failed in the upper chamber by a narrow margin.

In a meeting Fender held during the week of April 2, the JOBS Act was discussed, a Fender spokesman said. In bipartisan messages on the legislation, which was supported by President Obama and quickly signed into law April 5, supporters of the law said it was aimed at aiding start-up and small businesses. Over the years, Fender purchased a good number of other businesses. These included in 2007, Kaman Music Corp., parent of Ovation guitars and Genz Benz Amplification, and, in 2003, amp-maker SWR, the first products of which were made in a California garage.

Some of Fender’s other successful targets have helped inspire musicians for many years: Guild, Gretsch, Sunn, DeArmond, Tacoma, Charvel and Jackson. In 1965, CBS bought Fender, but sold it in 1985.

Critic: Fender Should Avoid the `Purple Haze.’

A central critique of the JOBS Act is that it permits companies to seek shareholders while bypassing for lengthy periods legal requirements to certify internal controls and SEC rules.

Some observers point to the recently revealed second wave of reporting problems at investment hot-ticket Groupon and how, under the new IPO-promoting legislation, such problems could be hidden.

“Fender Musical Instruments Corp. should choose to avoid the ‘purple haze’ created by the JOBS Act by opting out of the anti-investor provisions of Title 1 of the Act,” says Jeffrey Mahoney, the general counsel of Council of Institutional Investors and a CPA. “Those provisions allow ’emerging growth companies” like Fender to defer important disclosure, accounting, auditing, and investor rights requirements that are essential to an efficient and effective capital market system.”

Jack Ciesielski, president of investment firm R.G. Associates, Baltimore, and publisher of Analyst’s Accounting Observer, wrote in an e-mail April 5 that Fender “is far from an ‘emerging’ company, in the sense that it’s newly formed. (Which is the impression that the JOBS Act seems to create, isn’t it?)”

“In that regard, it emerged decades ago,” wrote Ciesielski, a CPA and former member of accounting rulemaking panels of the Financial Accounting Standards Board and the American Institute of Certified Public Accountants. “Which also makes me wonder – how long can a company be an ‘emerging growth company’?”

He continued: “You have to wonder if this can be a label that comes back to haunt a firm. Or tarnish the whole class of companies – especially if there are a few scams that develop, or the inevitable bankruptcies of some.”

At the National Venture Capital Association, a key booster of the IPO legislation, Emily Mendell offered a different melody April 10. Mendell, NVCA’s vice president of communications, suggested that the age of a company would not matter in determining whether it should be officially deemed “emerging” and thus in the scope of the new law. She suggests the act mainly will help smaller, start-up companies.

“We’re not expecting a slew of companies that are 60 years old going out to do” initial public offerings, she said in an interview. “I fail to see that’s a problem.”

Steve Burkholder
Bloomberg BNA Staff Correspondent
[Full disclosure: The author owns three Fender basses. He likes them a lot.]
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