JOBS Act perk allowed Twitter to act in secret as it prepared for a possible IPO


As Twitter prepares to sell its shares to the public, its ability to keep under wraps some of its key financial data is only one of the perks available to it under a relatively new law. (David Paul Morris/Bloomberg)
September 13, 2013

Last year, Twitter would not have been able to send its tweet heard ’round the world.

On Thursday, the company announced in its 140-character way that it was preparing to sell shares to the public — and that it had confidentially filed the necessary paperwork with regulators. A law adopted in April 2012 allowed Twitter to act in secret and keep under wraps some of its key financial data.

And that’s just one of the perks available to it under the JOBS Act.

The new law allows firms with an annual revenue of less than $1 billion to temporarily bypass some regulatory hurdles as they file initial public offerings, and even after. The idea is to make it easier for these “emerging growth companies” to go public, grow and hire more workers.

The companies have an a la carte menu of options, and Twitter chose a popular one by confidentially submitting the IPO paperwork to the Securities and Exchange Commission.

The financial details in that paperwork — such as whether the firm is profitable, what it pays its employees or what kinds of risks it faces — won’t be made public until 21 days before Twitter’s roadshow, when it starts to market itself to potential investors.

About two-thirds of the 132 initial public offerings priced so far this year opted for confidential filings, according to Renaissance Capital, which specializes in IPO investing and research. For those companies, the appeal is that they don’t have to show their hand to rivals. But some see a downside, said Kathleen S. Smith, a principal at Renaissance.

“We would prefer to have full details of the filing made publicly available as soon as possible so that we have enough time to do serious analysis of the company,” said Smith, whose firm advises a mutual fund that invests in a portfolio of newly public companies.

The rules for emerging growth companies have been relaxed on other fronts too, though it’s unclear if Twitter will tap into any of those options.

For instance, investment banks that take one of these companies public are allowed under the JOBS Act to publish research about the company, removing a firewall put in place after the dot-com bust, when it became clear that banks were promising to hype companies’ stock through research to secure the lucrative underwriting business.

The companies can also opt to delay a costly audit of their internal controls that was mandated for all companies after the Enron accounting scandal. In addition, shareholders are barred from taking a non-binding “say on pay” vote to advise management on whether the compensation of top executives is appropriate, an option granted under the Dodd-Frank financial overhaul measure just a few years ago.

“Dodd-Frank was in 2010, and then we come back a few years later and we say: ‘Never mind,’ ” said Bill Beatty, a top official at the North American Securities Administrators Association, which represents state securities regulators. “To change course so quickly seems kind of premature.”

The relaxed rules only apply for up to five years, or possibly less if a company’s revenue hits $1 billion or meets some other criteria laid out in the law.

Supporters of the JOBS Act say that every one of the accommodations granted to these companies exists in some other area of the market. Confidential filings, for instance, have long been allowed for foreign firms that file initial public offerings in the United States.

As for the $1 billion revenue threshold that determines what qualifies as an emerging growth company, it makes sense when put in context, said Joel Trotter, a securities lawyer at Latham & Watkins who served on a task force that helped shape the legislation. Companies of that size represent only 3 percent of the total value of U.S. companies, he said.

“We didn’t want to create a shadow system or a small company kind of system” by setting a lower threshold, Trotter said. “That wouldn’t have served the purpose of helping smaller companies enter the public markets in a way that allows them to expand and grow.”

So far, several analyses have concluded that many companies are shying away from most of the options available to them but embracing the confidential filing alternative.

Companies are under no obligation to announce that they have filed confidentially with the SEC, and in fact many of them have not. They would rather avoid the stigma if they decide against going ahead with an initial public offering, said Jay Ritter, a finance professor at the University of Florida.

“Twitter removed that advantage,” Ritter said, “which leads me to conclude that Twitter is very confident that it’s going public.”

Dina ElBoghdady covers housing policy for The Washington Post.
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