An increasing number of companies are taking advantage of regulatory changes that were approved last year to make initial public offerings simpler and less expensive, but investor advocates say some of those practices come at the expense of transparency.
The provisions were approved in April 2012 as part of the Jumpstart Our Business Startups Act, or Jobs Act, broad legislation designed to make it easier for young companies to raise capital, attract investors and ultimately go public.
The law specifically alters some of the financial disclosures and accounting practices required of “emerging growth companies” — defined as firms with less than $1 billion in revenue — as they pursue public offerings.
The Washington region has seen those rule changes brought to life in the recent IPO filings of two of its own: McLean-based event software firm Cvent and Blacksburg-based life sciences company Intrexon.
Representatives from both companies declined to comment for this article.
Cvent took advantage of perhaps the most widely used provision to date, which allows emerging growth companies to keep initial correspondence with the Securities and Exchange Commission confidential. Firms must formally announce their intention to go public only about three weeks before doing so.
Cvent, for example, said in a filing last week that it has been preparing for its IPO since January and submitted a confidential draft registration to regulators in April. The firm is expected to start trading this week.
Advocates say the new rule allows firms to weigh a possible public offering without committing to one and to clean up their filings before the scrutiny of the public eye. That provision might have helped Chicago-based Groupon, whose accounting practices came under intense fire during the run-up to its IPO.
Neil Dhar, capital markets leader at PricewaterhouseCoopers, said roughly 90 percent of companies that pursue public offerings qualify as emerging growth companies. A large portion of those companies take advantage of confidential filings.
“Companies are now popping up a month before going public, so it’s harder to follow the pipeline. It’s allowing companies to explore different options,” Dhar said. “The way the markets have been the last few years, markets have been opening and shutting pretty quickly. What we’re finding is their board and senior management . . . [want to] access the markets at a moment’s notice.”
PricewaterhouseCoopers tracked the number of emerging growth companies using the new provision between April 6, 2012, when the Jobs Act first passed, and Aug. 1, 2013. In that time, 93 firms that went public filed forms confidentially, and an additional 32 announced intentions to go public after filing confidentially.
Steve Hall, securities specialist at Better Markets, a D.C.-based nonprofit group that pushes for financial transparency and reform, said the organization’s concern with the provision stems from information being screened or scrapped before being released to investors.
“That process may end with less information released to the investor community, and that’s a bad thing,” Hall said. “The securities laws are fundamentally premised on the notion that investors are entitled to have full, accurate, complete material information about an issuer that wants their money.”
But Dhar said that even the confidential documents are subject to the same legal and financial review by regulators and that the three weeks between a public announcement and IPO provides time for investors to thoroughly comb through the documents.
“Any document that’s filed with the SEC still has to be a robust, full document that has the necessary diligence,” Dhar said. “I haven’t seen that big of a switch in mind-set or any negativity that’s come out of that.” “All of that is still continuing to take place.”
Other provisions in the Jobs Act have been utilized less, as the benefits to emerging growth companies seem less certain. One rule, for example, allows those companies to provide two years of past financial data rather than the three years previously required.
The consolidated financial information in Cvent’s filing looks back as far as 2008, while Intrexon’s filing appears to show numbers only from 2011, 2012 and the first three months of this year.
“What I’ve seen is most companies continue to provide three years of financial reports instead of two because they think investors expect it,” said Barbara Roper, director of investor protection at advocacy group Consumer Federation of America. “They think it makes them look like immature companies that aren’t ready to be raising from the public.”
Indeed, the provisions create new decisions for emerging growth companies. Intrexon said in its filing that it would not take advantage of a rule allowing the company to use different accounting practices than larger public companies but that it was still undecided on which Jobs Act rules it would use.
“We cannot predict if investors will find our shares of common stock less attractive because we may rely on these exemptions,” Intrexon wrote in its filing. “If some investors find our shares of common stock less attractive as a result, there may be a less active trading market for our shares of common stock and our share price may be more volatile.”