Idealab! Hatches Initial Public Offering

As part of a growing trend within the already intertwined worlds of venture capital and IPOs, idealab! recently registered for a proposed $300 million IPO that will be led by Goldman Sachs & Co.

The filing may pique a fleeting interest, however, because it comes at a time when the NASDAQ is being walloped and when IPO withdrawals and postponements are rampant. More importantly, it has long-term consequences that could lead to a reevaluation of SEC regulations that have precluded VCs from tapping the public markets. “It’s an example of the experimentation that’s going on within the industry, and we’ll see it more often,” said Josh Lerner, a professor at the Harvard Business School.

The heart of the matter is the so-called Investment Company Investment Act of 1940, which concerns companies whose main business is investing, reinvesting, owning, holding or trading securities. Companies falling under this category are those deemed to own investment securities with a value exceeding 40% of the value of it total assets, not including government securities and cash, on an unconsolidated basis.

Such is the case with idealab!, and as it points out in its prospectus, registering as an investment company would run counter to the company’s “fundamental business strategy of equity growth through creating, building and operating interactrive communications companies,” as it would force idealab! to buy or not to buy, and sell or not to sell, stakes in companies that it owns or wants to own when it would choose otherwise.

Indeed, many venture capital firms shy away from going public precisely because of the fundamental intrusion registration would have on their business. It is likely that idealab! would not have taken the plunge were it not for the exemption, something it wrestled the SEC for for months. Even so, it is an issue that is not altogether closed, as the exemption is only temporary, set to expire July 26, and a decision on permanent status is still pending. But should the exemption go permanent, it would provide more impetus for the kinds of legislative changes that could forever change the regulatory landscape and allow VC’s to go public.

Given today’s changing financial realities, questions have been raised about the modern viability of the 1940 Act. One new factor, unsurprisingly, is the Internet, which, as Lerner puts it, “rewards synergies across different business models.”

Secondly, corporate venture capital activity is reaching new highs, as corporations view buying ideas and the companies that spawn them as more cost effective than developing and paying for the development of ideas from scratch in house.

It is no secret, however, that legislation moves far slower than business, and change does not seem imminent. “To the best of my knowledge, there are no packages going over from the SEC to Congress that have to do with changing the Company Act of 1940,” said John Hinie, an SEC spokesman.

“The changes won’t happen overnight,” Lerner added.