The Securities and Exchange Commission’s covert mode power-up went online last week with companies of all sizes gaining the right to file a “stealth” initial public offering without immediately letting the public know. The news is a coup for companies concerned about data leaks surrounding their inner workings.
The confidential filing option, which up until now has only been available to companies earning less than $1 billion in revenue, helps private companies protect their financial and business strategies while going through their draft offerings with the SEC. It also gives them control over the timing of the public offering announcement.
The “stealth IPO” option was created under former President Obama’s Jumpstart Our Business Startups (“JOBS”) Act in 2012. In the first three years, the SEC had 850 firms go the confidential route, the Wall Street Journal reports. Snapchat parent, Snap Inc., ad software firm Trade Desk, and meal delivery company Blue Apron all made confidential filings.
The latest move, officially in place July 10, looks to widen that appeal.
“By expanding a popular JOBS Act benefit to all companies, we hope that the next American success story will look to our public markets when they need access to affordable capital,” said Chairman Walter J. Clayton. “We are striving for efficiency in our processes to encourage more companies to consider going public, which can result in more choices for investors, job creation, and a stronger U.S. economy.”
While companies will eventually have to disclose the IPO – rather S-1 as it’s officially called – the new rules allow them to wait until 15 days before their “roadshow” tour to present the company to potential investors, giving them a bit of time to weigh their options.
After all, not every company that files confidentially goes the IPO route.
Case in point: Parkinson’s drug developer Civitas Therapeutics filed confidentially with ambition to raise $80 million in an IPO in 2014 before being acquired for $525 million on the day of its expected IPO pricing. Waterpark operator Great Wolf Resorts also went the stealth IPO route before being snapped up by private equity firm Apollo Global Management for a reported $1.35 billion before it could go public.
The new rules allow a company to withdraw their filing if they hit a hiccup or the markets go in an unfavorable direction, ultimately preventing their sensitive business info from falling into competitors’ hands.
As David Zaring, associate professor of legal studies at the Wharton School of the University of Pennsylvania, argued in a recent op-ed for the New York Times’ DealBook, allowing the SEC to confidentially review a draft of the IPO is a great step to “get the approval of the Securities and Exchange Commission without public agony.”
“In a non-confidential filing, investors can view the registration statement as soon as the company has filed it and can view the back-and-forth between the agency and the company,” he explained. “Sometimes, the agency requests changes in the registration statement, which can be embarrassing for the company, as well as its lawyers and bankers.”
But filing confidentially doesn’t guarantee the information will be kept confidential, says Zaring, who remarks that it adds “another layer of people to the already large number who are working on a public offering.”
“In addition to the executives at the company working on the offering, outside lawyers and bankers will also be involved,” he says. “Now, commission employees will know about pending offerings before investors find out – it is not easy to capitalize on this knowledge, but people certainly have traded on government information before.”
As Zaring points out, the stealth IPO is not a perfect solution. It still opens the doorway to outsiders both on the deal team side and within the SEC. But the slackening of the rules, combined with secure document sharing tools like virtual data rooms, will make it easier for companies to protect the lifeblood of their business. Virtual data rooms, or VDRs, allow companies to control access to and encrypt sensitive company information whenever it is shared with parties outside the corporate firewall, and keep an audit trail of who’s actually accessing the information.
The result is, hopefully, a safer and more attractive environment for companies, including tech wunderkinds like Uber, to raise public money.
Then again, we suspect Clayton, a former Wall Street lawyer and advisor on mergers and initial public offerings, including the biggest ever, Alibaba Group of China’s $25 billion offering in 2013, had that in mind when he expanded the rules.
