A provision in the 2012 Jumpstart Our Business Startups (JOBS) Act lets companies with less than $1 billion in annual revenue, known as “emerging growth companies,” plan “stealth IPOs,” allowing them to withhold sensitive financial information from competitors and the public until right before pitching big institutional investors. However, after the initial stock sale, companies must publish all correspondence with the Securities and Exchange Commission (SEC), just as they were required to do before the JOBS Act, a point supporters rely on to argue that things haven’t changed too much. According to The New York Times (page B1 of Today’s New York edition), between 70 and 80 percent of IPOs priced last year in the United States began as confidential filings, and as many as 75 percent (see, it’s difficult to know exact numbers now) ultimately chose not to go through with it.
Although the provision applies to all industries, it’s been particularly relevant to technology companies, which can often scale at incredible rates and fail to bring in $1 billion in annual revenue, or even turn a profit, while boasting astronomical valuations. Twitter, a zero-profit company that was trading at $65.97 before its disappointing quarterly earnings report and has been valued at up to $49 billion, is a prime example of a technology company opting for a stealth IPO. Box, an online file sharing and content management service for businesses, just filed confidentially for a public offering. Airbnb, the sharing economy alternative to hotels, designer fashion flash sale site Gilt, and GoPro, maker of “the world’s most versatile camera,” are all following or expected to follow suit.
It’s a choice with several advantages and virtually no downside. Of the 75 percent of companies that decided not to go through with their IPOs in 2013, none were required to make sensitive financial information accessible to competitors. It allows companies to safely test the waters, and, if necessary, get out of the water unharmed. The rationale behind the law was that making it easier for smaller companies that aren’t yet well known to go public would lead to more IPOs and less acquisitions. Prior to this provision in the JOBs Act, getting acquired has always been an easier process than going public and some level of balance had to be reestablished, according to supporters.
Some critics have likened Twitter and the other companies mentioned above to sharks taking advantage of safe waters established by Congress to protect smaller, relatively unknown companies. But what do you expect them to do? If the law also applies to them and is in their best interest, of course they’re going to take advantage of it!
We’ll have to wait and see if this provision actually leads to more IPOs and a decrease in companies getting swallowed up by the likes of Google and Facebook in 2014. If nothing else, it will at least extend the conversation before deciding that there are worse things than a billion dollar buyout.