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Twitter's 'stealth IPO' shines spotlight on JOBS Act's effects

The JOBS Act, which lets start-ups seeking to go public file their paperwork confidentially, aims to reverse the steep decline in IPOs over the last decade.

September 30, 2013|By Chris O'Brien and Walter Hamilton
  • Twitter's logo and homepage are displayed on computer monitors. Investors may finally get the details of the company's "stealth IPO" this week or next.
Twitter's logo and homepage are displayed on computer monitors.… (Andrew Harrer, Bloomberg )

SAN FRANCISCO — In fewer than 140 characters, or 24 words, Twitter Inc. disclosed that it was planning the highest-profile public stock offering since Facebook Inc.

But that was about all it did, leaving stunned investors and analysts scrambling for nearly two weeks to find out more. Sometime this week or next, they may finally get the details as the micro-blogging service is widely expected to make public its secret filing.

Twitter's "stealth IPO" has thrown the spotlight on a controversial law passed almost two years ago that rewrote the rule book for start-ups seeking to go public.

Congress passed the Jumpstart Our Business Startups Act in 2012, which included a provision that enabled young companies to file their IPO paperwork confidentially. After being vetted by regulators, Twitter has to publicly reveal the IPO filing documents only 21 days before it begins pitching its stock offering to investors.

The JOBS Act was a major victory for Silicon Valley, where tech leaders hoped that cutting the costs and headaches of going public would reverse the steep decline in IPOs over the last decade.

More than 18 months after the law went into effect, nearly all eligible companies are opting to file privately for their IPOs. Although the practice has become widely adopted, it's less clear what effect the new rules have had on the IPO market.

Supporters point to the increase in IPOs this year as evidence that the new law is working. But many other observers say IPOs are up thanks to economic factors, and they worry that the law will hurt the process by giving investors less time to evaluate companies.

"It's a very mixed bag," said Lise Buyer, founder of Class V Group, which advises companies on their IPO process. "What's appealing about it for companies is that they can keep their information confidential until they're absolutely sure they're going to IPO. From an investors' standpoint, that's not helpful at all."

The JOBS Act created several exemptions for so-called emerging growth companies looking to go public. Companies with less than $1 billion in revenue could submit fewer years of financial information, less data on executive compensation and could opt out of some types of audits. They were also free to test the waters for their offerings by having conversations with analysts and investors before the filing became public.

But the most widely used of all the new provisions is the confidential filing. Of the 57 companies that had filed to go public in the third quarter as of late last week, 49 of them, or 86%, did so under the JOBS Act, according to research firm Dealogic.

This change had gone largely unnoticed by most people until last month when Twitter tweeted its announcement, something it was not required to do.

In Silicon Valley, the law was seen as one of the region's biggest political triumphs.

The region had been suffering through an IPO drought since the dot-com bubble burst in 2000. According to Securities and Exchange Commission statistics, the U.S. had an annual average of 311 companies go public from 1980 to 2000. From 2000 to 2011, the annual average fell to 102 IPOs.

Many blamed the drop in IPOs on costly new regulations imposed by the Sarbanes-Oxley bill passed in the wake of corporate scandals such as Enron and WorldCom.

Others pointed to structural changes in the technology industry, which had become more mature and had begun to focus on consolidation, or the stock markets, where the number of public companies overall has been falling since the late 1990s.

Whatever the case, the shift was considered bad news for the U.S. economy, because companies that go public tend to create more jobs than those that get acquired by another company.

The trend hit Silicon Valley particularly hard. IPOs are the mother's milk of the region's innovation economy. They provide big returns to entrepreneurs and venture capital firms, which then use a portion of that money to invest in new start-ups.

In 2011, an ad hoc IPO Task Force was formed with entrepreneurs, venture capitalists and lawyers to study the problem and propose fixes. Joel Trotter, a partner with the Latham & Watkins law firm and a task force member, said the group wanted to find a way to nudge more companies toward an IPO rather than an acquisition.

"There are so many companies today that are household names that started off as these small companies," Trotter said. "We wanted to help restore the balance."

The group eventually proposed creating an "IPO on-ramp" for emerging growth companies, or those with less than $1 billion in annual revenue. They would be exempt from some disclosure rules while they prepared for their IPO, and then for up to five years after they went public.

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