Everything You Need to Know About Twitter’s ‘Confidential’ IPO
So much confusion. So little time to dispel it
We’re on Twitter time now. The official announcement, sealed with a Tweet of course, said simply, “We’ve confidentially submitted an S-1 to the SEC for a planned IPO.”
Not following the “jobs and growth” movement? You may have missed a newfangled way start-ups can start the process of raising money from the public — and create jobs and economic growth—with less regulation and much less paperwork. On April 5 of last year, the Jumpstart Our Business Startups Act (JOBS Act or Act) became law in the U.S. Don’t let the rah-rah of the law’s title fool you. This law is all about making it much easier for private companies to access public capital with less muss, less fuss. The law also provides relief to certain companies, emerging growth company or EGCs, so they can go public on U.S. exchanges without providing as much information to investors as early in the process as they used to.
All this easy access to investors’ wallets means some “radicals” accused lawmakers of trying to pull a fast one. Eliot Spitzer was blunt:
“It shouldn’t be called the JOBS Act, it should be called the Bring Fraud Back to Wall Street Act.”
EY is the global public accounting firm of choice to emerging social networking/social gaming companies such as Groupon, Zynga, and Facebook as well as veteran technology and media companies such as Google, HP, News Corp, and Oracle.
Twitter’s auditor is probably EY, given EY’s market dominance in the Silicon Valley emerging growth tech environment and EY’s deep “experience” with Facebook, Groupon, and Zynga. Twitter did not reply to a request for auditor information, and CEO Dick Costolo did not reply to my open request via Twitter.
A recent EY survey says U.S. investors believe the main benefits of the JOBS Act are those “that affect the offering process (e.g., allowing immediate analyst coverage after an IPO, giving companies the ability to test the waters with certain investors) rather than those related to disclosure and compliance relief for emerging growth companies (e.g., deferral of auditor attestation on internal control, reduced financial reporting periods).”
The privilege of a “confidential” initial public offering is only available to companies with less than $1 billion in revenues. So, one thing we know for sure right now on that basis: Twitter has less than $1 billion in revenues. That hasn’t stopped many reporters from speculating about when Twitter will be a $1 billion dollar revenue company, often quoting eMarketer, a research firm that has become the ubiquitous source for Twitter financial data. In response to the question, “Why should you trust our numbers?” the research firm replies, “Because they are widely cited.”
I described the “no-check” phenomenon for private company financial information in a column earlier this week. Reporters covering the Twitter IPO continue this trend by quoting revenue figures without broaching the subject of whether their sources are reliable, self-serving, or potentially biased. Some quote with no attribution. Bloomberg reporter Brian Womack late last night, quoted a Twitter revenue forecast without attribution. An earlier report by Womack and two others attributes the financial forecasts to eMarketer. In my opinion, quoting eMarketer for Twitter revenue forecasts is like quoting temporary services firm Manpower Group’s Quarterly Employer Outlook Survey as a “trusted forecast of labor market activity.”
Really?
The New York Times Dealbook column does a better job caveating internal figures obtained from confidential sources that suggest Twitter is profitable.
By its own estimates, Twitter was profitable in December of last year and generated more than $100 million in revenue in the final quarter of 2012, according to numbers in an e-mail shared among staff. These numbers could not be independently verified.
So why is Twitter filing for its IPO confidentially?
One advantage to a confidential submission is its numbers and other strategic info stays private until twenty-one days before road shows when the public S-1 document must be filed. That helps Twitter work out any flaws in the numbers with the SEC quietly but doesn’t leave a lot of time for investors to review the S-1 before they make a purchase decision. Wouldn’t you, too, want to avoid the glare that killed Groupon and Facebook during their IPOs? (If EY is Twitter’s auditor, you can count on the firm to have written the rules a few years ago that it’s auditing now, especially for revenue recognition. The SEC, sadly, doesn’t always immediately agree with them.)
The SEC promises to send any comments or questions to the company right away. The review process is intended to take no longer than for a traditional filing. That Q&A stays confidential, too, during the process. However, the confidential file and info about how many rounds of questions the company answered before gaining SEC approval are eventually made public. The confidential draft (or drafts) is included as Exhibit 99 with the public registration statement.
Twitter could also be trying to gain a strategic advantage from publicly announcing the confidential submission, via Twitter, if it’s simultaneously shopping itself. Potential bidders can gauge public interest in an IPO while enjoying private access to financial info via their due diligence. Twitter gets its draft registration statement reviewed without having to share that same financial info with the public.
This strategy may be used more often now that the SEC implemented Title II of the JOBS Act in July permitting general solicitation in private placements to accredited investors, according to law firm Latham & Watkins in its “The JOBS Act After One Year: A Review of the New IPO Playbook.”
A confidential submission process buys you a bit more time with your auditors, including not having to disclose publicly who the auditor is. Few make an investment decision based on who plays the company’s auditor. On the other hand, given the Groupon, Zynga, and Facebook IPO debacles, all presided over by EY, there’s more focus than ever on auditors who don’t catch pre-IPO accounting mistakes. A draft submission doesn’t have to be signed by auditors or to include the consent of auditors and other experts since it’s not a “filing” for purposes of the Securities Act Sections 5(c) and 6(a).
The SEC does expect, however, that draft registration statements are substantially complete when they are submitted, including signed audit reports from the registered public accounting firm covering all the fiscal years presented in the registration statement and exhibits.
Twitter, as an EGC, can provide only two, rather than three, years of audited financial statements and as few as two, rather than five, years of selected financial data for comparison purposes. That information is not required until the public filing although, as mentioned above, the auditor’s signed opinion for the prior two years is required now.
Twitter doesn’t have to pay SEC filing fees, yet, while in the confidential submission stage. Confidential submissions do trigger FINRA filing requirements and payment of FINRA’s applicable filing fee. FINRA also allows a confidential filing process for JOBS Act companies so that’s probably not a way to see when, exactly, Twitter sent the SEC its submission.
Twitter doesn’t have to name any underwriters in its first confidential submission, but SEC staff will typically not continue any substantive review of a draft registration statement if underwriters are not named by the second submission. Several reports have named Goldman Sachs as the underwriter, but neither Twitter nor Goldman Sachs will confirm this.
There aren’t too many negatives associated with taking advantage of the confidential submission process if you qualify.
Dave Lynn, an editor of TheCorporateCounsel.net blog, mentions on that site one interesting unintended consequence of the confidential submission process he heard from bankers back in June: Visibility into the “pipeline” is all screwed up. They don’t have as good a feel for what is out there in the market going public, which could ultimately impact marketing and valuation.
One big disadvantage to Twitter of its confidential IPO approach is the impression left on some, like Heidi Moore of the Guardian, that Twitter’s choice of a roadshow of “elite” investor versus a “public viewing” share offering process is dispiriting.
A secret IPO for one of the world’s most prominent communications companies is a major fail whale.
But Treehouse Capital’s Rob Majteles says general retail access for Twitter shares would signal a failed IPO.
IPOs are designed to spin a small amount of a company to a small amount of investors, for a variety of reasons — some good, some bad. The “average Joe and Jane” aren’t in that small group — if they are, it only means the bankers involved couldn’t get it done with their A, B and C lists and have moved on, with a now broken IPO, off-list to everyone else.
I’m a big fan of Twitter, but I’ll leave investing in it to those who can afford the risk. They can flush out all the problems first. In the meantime, I’ll keep tweeting.
Disclosure: Medium co-founder Ev Williams is a co-founder and part owner of Twitter.
