Twitter and its IPO must have been one of the topics most written about last week. For the uninitiated, Twitter tweeted, of course, last Friday that it has confidentially submitted an S-1 to the SEC for a planned IPO. Based on the media frenzy that ensued, one could have assumed that it was about the most anticipated debut since, let’s say Facebook. A lot was made of the fact that it submitted its filings “in secrecy.”
Let me tell you, though, that it’s just been utilizing one of the tools Title I of the Jumpstart Our Business Startups (JOBS) Act gives to qualifying companies to make the IPO process a bit easier. The relief is available only to “emerging growth companies (EGCs),” which are businesses that have less than $1 billion in revenues. That’s of course a formidable threshold, and most of the post-Title I IPOs qualified as EGCs. Whether Twitter is an emerging business or not was the subject of much debate, but the threshold is what it is.
The purpose of the JOBS Act is to spur corporate and economic growth after the financial crisis, and the Chinese menu of relief tools that the Act provides is designed to exactly do that. A company can choose none, some or all of the accommodations offered by the Act. If it selects to do so, it must disclose it in its prospectus. Most companies who took the leap and filed an S-1 took advantage of at least some of the accommodations provided by Title I.
Under the JOBS Act, EGCs may submit their S-1 Registration Statements with the SEC confidentially, so only the SEC can see and comment on it until it’s final. Companies then must make their public filing 21 days before they launch the “roadshow,” which is when they shop the IPO to investors and price the deal.
Twitter was among the many companies to use the JOBS Act to file confidentially. There are many reasons why companies may keep the initial stage of the process confidential: they may want to retain the option to abandon the plan, avoid public scrutiny of changing disclosure based on SEC comments, keep distraction of management in the wake of the initial filing to a minimum, and keep their IP, trade secrets and sensitive information under wraps until the entire project becomes more definitive.
Of course, the fact that Twitter tweeted about the launch defeated to some extent the purpose of a confidential submission, but I am sure Twitter and the best and the brightest it surrounded itself with had great reasons for it and it’s moot to speculate. On a side note, though, I was personally (lawyerly) pleased that they squeezed the disclaimer in the tweet and it still made the 140.
Testing the Waters
Title I also allows EGCs and their underwriters to engage in oral or written communications with qualified institutional buyers and other institutional accredited investors before and after the filing of the S-1 to assess investor interest. On its face, this relief could ease the main concern of the management team that is already stressed to the max by the entire process, namely that there is no appetite for it/its story/the industry etc in the market. It appears though that the practical application of this provision is still evolving and the jury of its broad acceptance is still out. This may be explained by the fact that the antifraud provisions still apply to all of the communications, which becomes a concern if the disclosure in the S-1 changes significantly in the registration process. Also, the SEC has been scrutinizing all written communications under these rules.
Scaled Financial Disclosure
Under Title I, an EGC may provide two, rather than three years of audited financial statements and as few as two, as opposed to five, years of selected financial data. The MD&A also needs to discuss only the years for which it provides audited financial statements and subsequent interim periods. It’s not surprising that under the new regime many of the companies who IPO’d under Title I of the JOBS Act provided financial data for the longer period anyhow. Market forces may have dictated this — the success of an IPO is as much about reliability and discipline as about good timing.
Executive Compensation Disclosure
EGCs may use streamlined executive compensation disclosure. It appears that more than two thirds of EGCs that filed under the JOBS Act took advantage of this relief. In general, companies did not include a compensation discussion and analysis.
Internal Controls Audit
EGCs may phase in compliance with Section 404(b) of Sarbanes-Oxley Act of 2002 or reserve the right to do so in the future. Section 404(b) under SOX required an audit of the issuer’s internal controls over financial reporting by the company’s auditor. This relief was a popular one which most EGCs relied on.
Extended Phase-In for New GAAP
Under Title I, EGCs may also use an extended phase-in for new accounting standards. Very few companies made use of this accommodation. It goes to my earlier comment about financial disclosure. One would be ill-advised to use the IPO process and early phase of being public as a trial period. The market expects a business to be ready when it takes the big step.
I am inspired by the spirit of the JOBS Act, and Title I is no exception. It makes the process more streamlined, less distracting and intimidating, and maybe even quicker. The jury is still out whether it has encouraged more companies thinking about an IPO to actually do it. I doubt it. An IPO is such a huge step in a company’s life that is driven by macro, not micro-factors. If history is any indication, bubbles formed and burst under the old rules, and if you ask me it’s the current market that drives the surge of IPOs we are experiencing. But you betcha it has already saved companies tons of resources. And that makes it already worth it, if you ask me.
Eckerle Law offers legal advice in a variety of transactional and regulatory matters and serves companies’ plenary business law needs. Its founder, Bettina Eckerle, is a veteran of Debevoise & Plimpton and Wachtell, Lipton, Rosen & Katz. She also served as the General Counsel of two companies en route to IPO. Please visit the Eckerle Law website for more details.