The next big tech IPO is in the works. Twitter, the hugely popular short message social media site, announced last week that it has filed a Form S-1 registration statement with the SEC in connection with the company’s proposed initial public offering. This IPO has been rumored and anticipated for some time, and it will generate substantial interest among members of the tech and investment communities. This offering may not have the impact of last year’s Facebook IPO, but it will be close.
Twitter appropriately announced its planned IPO in a tweet on September 12:
(followed by a “get back to work” tweet):
This offering should proceed more smoothly and productively than the ill-fated Facebook IPO. The various participants in the IPO process learned a lot from the significant problems that the Facebook IPO encountered, and in some cases these lessons were driven home by significant monetary penalties (See my prior blog post regarding the Facebook IPO and its problems). No one wants a repeat of that situation, especially with such a high profile IPO. Twitter has also always impressed me as a more thoughtful and rational company than some in the tech space, and this should carry through in their IPO.
In its IPO filing process Twitter took advantage of one of the key available provisions of the JOBS Act. Section 6(e) of the Securities Act allows an “emerging growth company” to file an IPO registration statement on a confidential basis. This provision is designed to give the company and the SEC time to identify and work through potential problem areas or issues before investors see any information. It also allows companies to keep material nonpublic information confidential until late in the SEC review process. If the company decides not to proceed with its IPO, it has avoided the public disclosure of this information. If the company and the SEC can work out these problems and issues satisfactorily, the registration statement (amended as necessary) eventually becomes available to the public and the IPO process goes forward. This should make the registration process very quick and efficient after it emerges from the initial SEC review.
This confidential filing opportunity has been popular with emerging growth companies. According to an Ernst & Young JOBS Act study, approximately 63% of eligible companies used this process during the first year of its availability under the JOBS Act. The SEC has published a set of helpful FAQ’s which clarify many components of this confidential filing process.
Twitter added one interesting change to this confidential filing process, however. Many companies which have used this process have kept everything confidential until they have worked through the initial review with the SEC and are ready to embark on the public aspects of their offerings. Twitter, however, elected to publicize the fact that it had made the confidential filing with the SEC even though nothing will be available to potential investors at this point. The strategy here may have been to generate investor awareness of the proposed offering. This appears to be a totally legal and compliant strategy since at this point Twitter is not offering any securities for sale.
One point that has generated some controversy here is the high threshold for classification as an emerging growth company under the JOBS Act. The current threshold is $1 billion in annual revenue, which is certainly a much higher level than most people would use for an emerging growth company. At this level, approximately 90% of the companies that conducted initial public offerings over the last 20 years would have been emerging growth companies. Some commentators have criticized this high threshold on that basis that it prevents investors from seeing substantive information (at least for awhile) and that it would be better for the public if all information about these companies was available to the public from the start. Steven Davidoff has a good analysis of this position in his New York Times DealB%k post. He cites the examples of Groupon and Zynga, both of which encountered problems with the SEC regarding their accounting practices. Davidoff seems to think that there was some value in the public being aware of these problems at the same time that the SEC and the companies were working on them as it gave investors more information with which to evaluate these companies’ financial positions.
I don’t agree with the positions taken by Davidoff and others. I believe that the confidential initial review process of a company’s registration statement is a productive and efficient way to let the company and the SEC identify and work out problems ahead of time. If these problems can be identified and resolved ahead of time, how are investors disadvantaged? In most cases, the confidential filing process will happen without the public even being aware of it. Twitter is a special case because of the company’s very high profile and its decision to publicize the confidential filing, but most companies will probably not do this. In most cases, by the time the public becomes aware of the offering, the offering materials will have been vetted and scrubbed by the SEC and the company and presumably all major problems and issues will have been resolved. Remember also that the companies who use this process will still need to go through the normal IPO processes such as road shows, and the public will have access to a prospectus before making any investment decisions (although the registration statement only has to be made public 21 days before the start of the road show). I like this confidential review process and I believe that it is beneficial to investors.
One other thing to keep in mind as this IPO proceeds will be the choice of stock exchange and the scrutiny that this exchange will be under. Many of the substantial problems with the Facebook IPO resulted from technical problems and glitches encountered by NASDAQ in the course of the first day of the IPO. It’s certain that the exchange that is chosen for the Twitter IPO will be subject to intense scrutiny and substantial criticism if similar problems occur. This exchange should also remember the huge monetary penalties that NASDAQ incurred in connection with the Facebook IPO (as mentioned in my prior blog post).