Not all IPOs are created equal.
Some industry experts are warning investors to remain cautious of a provision of the JOBS Act that allows companies with less than $1 billion in revenue to file for initial public offerings confidentially.
The most recent example of a company filing a secret IPO is Twitter Inc., which revealed its confidential filing in a tweet on Sept. 12. Through the stealth IPO, executives are hoping to delay the frenzied public scrutiny that faced companies like Facebook Inc., Groupon Inc. and Zynga Inc.
“Institutional investors want as much time as possible to analyze information,” said Jackie Kelley, Ernst & Young Americas IPO leader, based in Irvine, Calif. “So having these companies enter into a confidential filing process and not getting the information until three weeks before the road show, (investors) don't necessarily see that as an advantage from their perspective.”
According to a survey conducted by Ernst & Young, only 38% of U.S. institutional investors believe the confidential IPO clause is the biggest benefit of the Jumpstart Our Business Startups Act, which became law in April 2012. That provision allows smaller companies to file their IPOs confidentially, meaning businesses can have conversations with regulators outside of the public sphere and make corrections to their registration documents in private. Groupon, which went public before the confidential process was available, faced questions from the SEC about accounting methods, which created a string of bad publicity leading up to its stock offering.
“We had seen a gradual dwindling of companies wanting to go public because it required a lot of resources and was somewhat of a daunting process,” said Emily Mendell, vice president of communications for the Arlington, Va.-based National Venture Capital Association. The confidential filing clause “takes a lot of the scrutiny out of the filing process. You've seen examples of media frenzies around companies in the past, and they aren't always helpful.”
Twitter's structural and accounting methods will be temporarily shielded from financial analysts and journalists, but that means potential investors will be kept in the dark, too.
“People were embarrassed because the (Securities and Exchange Commission) would make them change or correct their filings, but that really does give you invaluable information when all the sudden you see a filing like Groupon that is totally misleading,” said Lynn E. Turner, former chief accountant at the SEC and current managing director at Los Angeles-based consulting firm LitiNomics. “It tells you a lot about the competency of the financial management of the company. Those conversations are important.”
Companies that elect to file a confidential IPO eventually reveal their financials — 21 days before their road show to investors — but any exchanges with regulators are attached to the back of the corrected documents, which can diminish some of the immediate transparency to investors.
“You see the cleaned-up, amended piece later on, and that hurts investors because the initial thing gives you a flavor of how investor-friendly the firm really is,” said Ed Ketz, associate professor of accounting at Pennsylvania State University, University Park, Pa.