Going Public In Private: The Boom In Secret IPOs

Author: Todd Woody, Forbes Staff, May 2012

Have you heard about the IPO boomlet under way this spring? No? That’s because it’s a secret.

Officially, only 13 startups have registered initial public offerings with the U.S. Securities and Exchange Commission since April, according to figures compiled by Renaissance Capital. SEC spokeswoman Judith Burns, however, says that since April 5 another 20 companies have filed confidential – and to you and I, invisible – registration statements disclosing to the government but not to the public their financial performance, market risks and other information investors covet.

Who are these companies? Burns can’t tell me ­ – that would be against the law.

The statute in question is the Jumpstart Our Business Startups, or the JOBS Act, that President Obama signed into law on April 5. Among other things, it allows so-called emerging growth companies – startups with less than a $1 billion in annual revenues – to file secret S-1 statements with the SEC. The documents do not show up in any database and even the fact that a particular company has filed a confidential registration statement remains a state secret unless the startup chooses to reveal plans to go public, as Silicon Valley solar installer SolarCity recently did in a brief press release.

These black-box registration documents do have to be made public 21 days before executives begin a road show to pitch their IPO to big investors and analysts. But if they get cold feet and pull a planned offering before the road show, the filings remain confidential and no one will be the wiser.

“If the market window closes while you’re on file, this prevents you from being seen as damaged goods,” says Jeffrey Vetter, a securities lawyer with the Silicon Valley firm of Fenwick & West who handles tech-related public offerings. “Some registration statement can be out there for a long time and that can potentially taint a company.”

Case in point: Bright Source Energy. The Oakland, Calif.-based solar power plant builder filed its S-1 in April 2011 and a year later finally signaled it would go to market. Hours before its planned Nasdaq debut last month, executives pulled the offering citing market conditions.

And so Vetter expects secret S-1 filings to become routine. “Most of our clients who are talking about proceeding with an IPO are looking to take advantage of confidential filing,” he says.

That allows startups to avoid weeks or months of bad press – and these days, Twitter slams – when the government and investors scrutinize an IPO filing, such as the awkward spot Groupon found itself in last year when the SEC questioned its unorthodox accounting methods. “As part of the benefit of avoiding premature negative publicity, the company may avoid premature disclosure of sensitive information to competitors or others,” Joseph Kaufman, an attorney with Pillsbury Winthrop Shaw Pittman, said in an e-mail.

Other provisions of the JOBS Act have already become boilerplate in hundreds of public IPO filings by companies disclosing that they have or may invoke the law’s relaxation of accounting and executive compensation disclosure requirements.

Vetter and Kaufman argue that 21 days is sufficient time for investors to evaluate an offering. Still, some companies may opt to be transparent from the get-go, especially those that want to build buzz for their IPO – hello, Facebook – or don’t want to appear to be hiding anything.

The trend, though, appears to be toward the opaque. Burns, the SEC spokeswoman, noted that some of the 20 or so confidential filings made since April 5 are from companies that have opted to refile their previous public registration statements as a secret S-1s.

Given all that, why did SolarCity bother to announce that it had filed a confidential registration statement? That’s secret too. SolarCity spokesman Jonathan Bass says he can’t comment, citing SEC rules.

So investors are left to parse the startup’s press release:  “The offering is expected to commence after the SEC completes the review process initiated by SolarCity’s confidential submission on Thursday April 26, 2012 of its draft registration statement.”

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