Confidential IPOs Now Open to All Companies
July 20, 2017
Peter Bible, EisnerAmper Partner and Chief Risk Officer, discusses the SEC’s decision to expand confidential IPO availability beyond just emerging companies. Peter covers the history that gave rise to the provision in the Jobs Act for confidential IPO filings and how, on July 10, the requirement as to the size of the company had changed. Now, every company that’s considering going public can avail themselves of confidential IPO treatment. When submitting an S1 (the IPO document) for review, a company of any size can declare whether or not it wants its IPO to be treated as a confidential. Peter then discusses the pros and cons of this approach, which sectors are particularly excited about this ruling, a few well-known companies that have successfully used this strategy, and what advice he’d give to a client interested in going the confidential IPO route.
DP: So, Peter, tell us about this new wrinkle from the 2012 Jobs Act that took effect on July 10 of this year.
PB: Well, I think it’s important to understand, Dave, the history that gave rise to the provision in the Jobs Act for confidential filing. There was a company called Groupon that I think a lot of people are familiar with – getting coupons for a better purchase price. When it filed its S1, or initial public offering document, back then there was no confidential treatment, and all its accounting, -- right, wrong or indifferent-- was exposed to the world. Groupon was a high flyer, so it drew a lot of media attention, and over the course of six weeks subsequent to the filing there was a lot of very negative publicity about its accounting and disclosures. And that really drove them to withdraw the registration statement, and it significantly hurt the fair value of the company.
PB: That’s what gave rise to the Jobs Act’s provision. It allows a company to go in confidentially, have its document reviewed, and have its questions cleared by the staff before it ever sees the light of day by the public or the media.
DP: There was a new wrinkle on July 10 concerning the size of the company.
PB: Yes. It was actually a nice concession on the part of Congress because, as probably one of the most successful provisions of the Jobs Act, it extended it to every company that’s going public. So even large companies going public can avail themselves of confidential treatment.
DP: Is there certain information that you can keep confidential and certain information you can’t?
PB: It’s all or nothing. So, once you submit the S1for review, you either declare whether you want it to be treated confidentially or you want it to be open to the public domain.
DP: What’s the carrot here for companies? What’s the value?
PB: If your company is a high flyer – like Facebook, Uber, or Groupon — you know once you submit your document, that’s the first time that really insider information (from your financial statements to executive compensation to the structure of the company) finds its way into the public domain. This allows a third party – namely the SEC – to look at it, raise questions and raise concerns before it finds its way to the public domain. So that, again, is really beneficial for a company that none of its information, executive compensation or financial statements ever see the light of day.
DP: As I understand it, there are some sectors that this is particularly a good inducement for.
PB: Yes. I think startups – whether that be life sciences, technology, emerging technologies, pharmaceuticals – get the ability to see if they’re ready for prime time. They can kind of test the waters and see. I think they have a good handle on what they think their value is and what the value of the shares should be, but it also really puts their internal infrastructure through the washing machine and makes sure it’s clean before the public sees it.
DP: Are there any downsides to going this route?
PB: No. If your concern is speed to market, Dave, then I think it could slow you down – especially based upon what findings the SEC might have. Once it’s out there, the ability to do a road show to market the shares is not infringed upon at all. You could have a very long time from the time you file to the time you reach that initial public exposure and the road show. So in that amount of time, there may be an opening in the market for a company of your background, but that can close and open numerous times while you’re going through the confidential process.
DP: This is not theory at this point. This is a practice that is actually being used and has been used successfully. Tell us about that.
PB: Yes. Here again, a lot of companies that were qualified as startups or emerging growth companies under the Jobs Act enabled them to get their houses in order before they ever went out to the public markets.
DP: I’ve heard names like Twitter, Shake Shack and Snap. These are some heavyweights.
PB: Yep. Shake Shack is one that is a great example because it was a high flyer, it’s a very popular restaurant. And so immediately when it announced it was going public, that’s going to draw a lot of media attention. So this allowed them to get everything in order before the public saw its internal financials.
DP: What would you advise if a client came to you and wanted to put this strategy on the table? What would be a couple of talking points that you would need to go over with them?
PB: Well, I think the first issue is their speed to market. How quickly do they want to get this done? The other issues that I’d talk to them about would be, for example, the executive compensation table. Are you ready for your friends and family to know exactly what you’re making. I also think the quality of their earnings. How much have they grown and how much of that growth is really sustainable into the future. All of those are things to think about if deciding to go confidential or not confidential. I think the proposition is that going confidential is always better. DP: Great. Well, Peter, thanks for this insight. PB: Yeah. Thank you.
DP: And thank you for listening to the EisnerAmper podcast series. Visit EisnerAmper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast where we get down to business.