Show us your shorts

Debating the impact of BIO’s proposal on short disclosures

Absent any data showing a sustained impact of manipulative short selling on biotech valuations or their ability to raise capital, it is difficult to discern what direct benefit biotech companies would gain from BIO’s call for short sale disclosures. It does, however, appear that long investors could benefit from reduced volatility in stocks they hold.

On the flip side, certain shorts could be forced to rethink their tactics, possibly including the need to take on more risk.

On July 18, BIO presented to the House Financial Services Committee’s subcommittee on capital markets, securities and investment as part of a hearing titled “The Cost of Being a Public Company in Light of Sarbanes-Oxley and the Federalization of Corporate Governance.”

The hearing’s goal was to examine factors that influence a U.S. company’s decision to go public, along with the challenges they face as publicly traded companies.

Among other proposals for reducing the burden of being a small public company, BIO proposed that short sellers should be required to disclose positions that cross yet-to-be-defined percentages of shares outstanding or volume.

BIO argued that “manipulative short sellers” and the strategies and tactics they employ are especially harmful to capital formation in the biotech industry given the hefty capital requirements and the long timelines needed to develop drugs.

Activist short sellers come in a variety of flavors, but their general approach is to accumulate a short position and then drive down the share price of the target company via public dissemination of their bear thesis.

Not all short sellers are activists, and those who are can play an important role in taking management to task for hyping their companies, corporate malfeasance or otherwise failing to act in the interests of shareholders.

But some short sellers can and do disseminate damaging rumors and even falsehoods about the companies they target in hopes of driving down the shares and reaping a quick profit.

John Blake, SVP of finance at aTyr Pharma Inc., presented on behalf of BIO. In his testimony he said the impact of these abusive short selling behaviors is exacerbated by the fact that current regulations do not require short positions to be publicly

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