Did you read about Twitter’s initial public offering filing?
If you did, it was probably scant on details. The only public information from the company was a single message on its own Twitter feed: “We’ve confidentially submitted an S-1 to the S.E.C. for a planned I.P.O. This Tweet does not constitute an offer of any securities for sale.â€
That’s it.
So no selected financial data, no information about capitalization or operations, no “risk factors†â€" the sort of thing one typically finds in a company’s first filing for an initial public offering, known as a S-1. Thursday’s S-1 filing for Hilton Worldwide Holdings runs more than 200 pages, for example.
Twitter can fly under the radar because of the rules in the Jump-Start Our Business Start-ups or JOBS Act, which became law in 2012.
Among the concerns that opponents of the law had was exactly the kind of situation that is now going on with Twitter: a prominent company, known around the world, has filed for what will most likely be the most anticipated stock offering since Facebook â€" and we know precious little about its business.
How is this possible?
The JOBS Act allows what it generously defines as “emerging growth companies†to take advantage of reduced regulation during and after an I.P.O. I say generous because Congress defined an emerging growth company as one with less than $1 billion in revenue. That is about 90 percent of I.P.O.’s over the last 20 years. It’s a broad view of what an emerging growth company is by any measure.
Twitter certainly has less than $1 billion in revenue, though, and so it qualifies. Heck, even Facebook would have qualified.
One of the major benefits of the JOBS Act is that Twitter does not have to disclose publicly its registration statement for its filing. Section 106 of the law states that a registration statement for an emerging growth company can be filed and reviewed by the Securities and Exchange Commission confidentially. According to Ernst & Young, in the first year of the JOBS Act, 63 percent of eligible companies filed their statements confidentially, making this one of the new law’s most popular provisions.
The document that contains all of the information about Twitter’s I.P.O. â€" including financial statements â€" only needs to be made public at least 21 days before the company’s Wall Street bankers start to pitch the planned offering to investors, in what is known as a road show. At this time, any amendments made in response to comments by the S.E.C. will also be made public.
The idea behind this provision is to allow companies to test the waters. The S.E.C. will review the companies’ filings confidentially so that the company can decide whether to proceed with an offering without the public knowing. Additionally, this allows the company to work out any problems with the regulator outside of the glare of the public eye. Proponents of this rule advocated for it for this reason. They also argued that because the amendments were eventually made public before the offering, this meant that the public got to see what went on. It just had to wait for the S.E.C. to review the registration statement.
Yet there might be value in having the regulator’s critique of a company’s I.P.O. occurring more or less simultaneously in the public eye. For example, both Zynga and Groupon received pushback from the agency over their accounting methods. This arguably allowed the investing public to better assess the financial results.
But for Zynga and Groupon, the experience probably wasn’t so great, because it led to sharp criticism of their filings and put their stock offerings on a back foot. In both cases, the S.E.C. process raised warning signs that turned out to be accurate about these companies. And let’s face it: does anyone believe that Twitter would not have gone public if filing confidentiality had not been available? In the end, the JOBS Act provision might help some real emerging growth companies, but the need to apply it so broadly is questionable.
Nonetheless, there is no movement to change the law, and the provision applies to Twitter. For the next one to three months, the S.E.C. will be reviewing the company’s registration statement. It will be a review that will occur behind closed doors.
Once the agency and Twitter agree on the disclosure, the I.P.O. document will be released. The next month thereafter will involve Twitter preparing and presenting its road show.
We may have to wait some time for Twitter’s filing. When we see it, I bet that it will be full of surprises, such as special shares that allow the founders to keep control of their company, and other maneuvers to take advantage of the JOBS Act relief. The question is whether this relief is really doing anything that helps the investing public.
In the meantime, we are in the dark. Perhaps Twitter will deign to tweet a bit more about its I.P.O. But I doubt it. Instead you are left with less than 140 characters of information. Welcome to the modern age of social media.
