Why have a secret and then publicize the existence of the secret? It seems counterintuitive, but companies planning initial public offerings, or IPOs, are doing just that.
The JOBS Act permits so-called emerging growth companies, or EGCs (meaning businesses with less than $1,070,000,000 in revenue), to submit confidential draft registration statements with the Securities and Exchange Commission, or SEC, and to keep these registration statements confidential until just 15 days before launching marketing roadshows. In July 2017, the SEC extended the same privilege to all IPOs, regardless of EGC status, making this option available to larger private equity-backed portfolio companies and other private companies for the first time. While most companies that make confidential submissions also generally get to keep the fact that they have made an IPO submission confidential, a number of companies have decided there is advantage in disclosing just that they have made a confidential submission in reliance on an SEC safe harbor.
Benefits of Confidential Submissions Under the JOBS Act
IPO registration statements contain detailed and sometimes sensitive information relating to a company, including audited financial statements, key operating metrics, strategy, detailed descriptions of their operations, valuation information, material agreements, and other disclosures. In addition, the SEC process itself may require additional disclosures not anticipated by management, including financial accounting changes.
Confidential submissions both allow the SEC’s initial critiquing of a company’s registration statement to stay out of the public view in the initial review stages, and also let companies keep all of this material information away from competitors and potential investors until later in the process, when the timing of the IPO becomes clearer.
In addition to the substance of the draft registration statements, many companies closely guard the fact that they are pursuing an IPO to avoid the embarrassment of a failed IPO attempt. This can occur for a variety of reasons, including a protracted SEC review process, preliminary investor feedback, market conditions, or other factors. Confidential submissions allow a company to avoid the risk of being tainted by a failed IPO attempt, while quietly preparing to move quickly once market conditions ripen before going public with its filings.
Because of these advantages, the confidential submission process encourages companies to go through the disciplining process of preparing for an IPO, even for companies less certain of whether an IPO is their ultimate endgame.
So Why Reveal the Fact of a Confidential Submission?
Despite the advantages of confidential submissions, some companies such as Twitter, Ancestry.com, and GoPro have made public announcements of the fact that they submitted a draft registration statement for confidential review, while maintaining the confidentiality of the actual submission. Rule 135 under the Securities Act permits such an announcement, even for a confidentially submitted registration statement, as long as the content is limited to specified items related to the proposed offering (expressly excluding mentioning the underwriters) and the announcement includes the appropriate securities law legends.
For example, announcing a confidential submission could generate excitement for a company’s workforce that could benefit recruiting and retention efforts, and enhance the company’s profile for strategic partnering and commercial relationships. In addition, for companies exploring a “dual track” of both an IPO and a company sale, such an announcement could attract potential acquirers by making it clear that the company may be in play for a potential acquisition, or providing leverage for price negotiations with a potential strategic acquirer. A company could enjoy all of these potential benefits while at the same time still pursuing an IPO, all without disclosing financial statements or other sensitive information to the public until the company prepares to move forward with a roadshow for an offering.
Since the JOBS Act became effective in 2012, confidential submissions have become the norm for “emerging growth companies” pursuing a potential IPO. The SEC’s expansion of this privilege to all IPOs, regardless of EGC status, means that even more IPO filers are likely to pursue confidential submissions of potential IPO plans. Companies pursuing the process will want to evaluate whether operating in pure stealth mode, or at least announcing the fact that they are in the IPO process, best serves their strategic objectives.