Suitably, the first official news of the long-awaited Twitter IPO came in fewer than 140 characters, from @twitter itself: “We’ve confidentially submitted an S-1 to the SEC for a planned IPO. This Tweet does not constitute an offer of any securities for sale.”
Just as Twitter shunned the 20th century method of a press release when it came time to inform the world that it plans to sell shares to the public, so it is taking advantage of a very 21st century path to that stock listing: the 2012 JOBS (Jumpstart Our Business Startups) Act. The law allows smaller companies with less than $1 billion in revenue to go public without the same level of disclosure early on in the process. That means that for now, at least, none of us can give you any more details than already were publicly available about Twitter and its financial performance.
This will be the most high-profile case of the “secret IPO” process at work, and one that may test the investment world’s view of the JOBS Act’s provisions. Once Twitter begins the roadshow process, 21 days before the anticipated pricing of the new shares, the company has to unveil the usual detailed information of its past performance and future expectations, including risk factors. The idea behind this is that the traditional IPO process offers too many bumps and risks for a small company, and thus may deter many from seeking a public listing.
Twitter, however, isn’t exactly the traditional small business, and this isn’t the prototypical “secret” IPO. In most cases, those IPO filings are designed to stay secret, giving bankers and the company a chance to put together the documentation, check accounting with the SEC and do a bit of preliminary scouting around. A company that then decides it doesn’t want to proceed with an offering at this time can yank the filing and never make it known that it was going to happen. That way, it avoids the stigma of being a failed deal, when after a very public process investors turn up their noses at the stock and walk away. Enterprise software company WorkDay, for instance, was an early user of this provision last year: It filed with the SEC at the end of June but didn’t make the filing public until the end of August, when it had decided to proceed.
Technically, Twitter qualifies for this kind of special treatment. Its revenues in 2012 were about $350 million and the buzz is that figure won’t top $1 billion until next year. All the more reason to get the IPO done in 2013: The process means a shorter time period during which outsiders can tear apart the business model and financial statements before the deal is priced, as well as the ability to keep any bickering between the company and the SEC over accounting issues out of the public eye. When it does make the filing public, it can do so without an outside audit and provide financial statements for only the last two years, if it chooses.
If you think that isn’t important for hot social networking companies like Twitter whose IPOs will generate lots of interest, think again. Groupon (NASDAQ: GRPN), for instance, had a dreadful IPO experience when it ended up having to restate its method of accounting for some marketing costs, turning operating profits into operating losses. Facebook’s long (and traditional) road to its IPO was made bumpier when it had to disclose, a few weeks before pricing, that it had had to cut its internal earnings forecast. With only three weeks during which any company forecasts are public information, no one would be aware of any deterioration in Twitter’s outlook. Investors would get a snapshot, rather than a view of how its prospects have changed in real time.
In the case of a company that will attract just as much excitement and that likely will emerge trading at a hefty premium to the market because of its high growth rates, bits of information like that are important for investors to have. Nor is Twitter a fragile emerging company whose business secrets need to be shielded from the eyes of rivals. Private investors have estimated its value at in the neighborhood of $10 billion and a public market capitalization could end up being much higher. In contrast, Xoom Corp. (NASDAQ: XOOM), which went public only days ago, using the same “secret IPO” method, has a market capitalization of only $1.17 billion.
Twitter’s tweet shows clearly that the company intends to have its cake and eat it, too. By making the “secret” IPO public, it gets to whip up excitement the way that Twitter has it planned, it gets to keep all the upside of the overheated market anticipation that accompanies a traditional IPO, while shunning the parts that aren’t quite as much fun, like having critics pore over your financial statements for the next month or two and question every change in wording as the filing is updated.
In Twitter’s case, using the JOBS Act provision isn’t about testing the waters. If it were, the company would never have Tweeted about its intentions. Instead, Twitter is using the new law to maximize its chances of raising proceeds from its IPO. That is completely logical, of course, and under the terms of the JOBS Act, completely legal. Indeed, why wouldn’t any company that qualifies to do so use this option?
Over the course of the year, those who have kept an eye on these “dark market IPOs” have commented at various times that about two-thirds of IPO filers are opting to use this route. In some cases, that’s reasonable. In others, it raises some governance and disclosure questions. Didn’t the Groupon and Facebook examples – however difficult they might have been for the companies themselves to deal with – provide very useful information for investors about high-growth, high-expectations businesses being offered to the public at a hefty premium? Would investors really prefer not to have witnessed the ugly bickering over Groupon’s accounting policies and been able to ponder what that said about the company’s management?
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In the case of Twitter – another company that investors are likely to be excited about owning – doesn’t it make sense to make sure that those investors have more than 21 days to scrutinize the vast amount of data that is included in an S-1 filing and to do their own due diligence? (Incidentally, that’s only the general public: The company and its underwriters get to “test the waters” by talking to a select group of institutions to gauge the value of the stock.)
Twitter may be acting within the letter of the law, but it hardly reflects the true spirit of the JOBS Act.
