Twitter’s Private Filing Signals New Wave of SecrecyLeslie Picker and Ari Levy
Twitter Inc., the business that thrives on a culture of excessive sharing, is taking a more discreet route to its initial public offering, adopting a strategy that others will follow.
The microblogging service sent out a 24-word tweet on Sept. 12, announcing that it had confidentially filed to go public with the U.S. Securities and Exchange Commission. It provided no financial details or time frame.
Twitter filed under the Jumpstart our Business Startups, or JOBS, Act signed last year. The legislation lets companies with less than $1 billion in annual revenue keep their most sensitive information away from the competition and the public until shortly before they promote the offering. Investors had better get used to the secrecy as a host of emerging technology companies, including Box Inc., Airbnb Inc., Square Inc. and Dropbox Inc., are likely to take the same path.
“There’s a lot of stress in preparing for an IPO,” said Jeff Crowe, a partner at Norwest Venture Partners in Palo Alto, California, and director at RetailMeNot Inc., which went public under the JOBS Act in July. “One stress you don’t want to have is tipping off the competition any sooner than you have to about what your business model is like.”
Under the rules for so-called emerging-growth companies, Twitter’s review process with the SEC will be confidential until at least 21 days before the road show, where the company will pitch investors before setting a final price.
The JOBS Act was created to simplify the IPO process for smaller companies and make it less expensive to go public. Between audited financial statements and legal costs, companies spend on average $3.7 million for their IPOs in addition to underwriter fees, according to a report last year from PricewaterhouseCoopers LLP.
Most businesses that can are taking advantage of the rule. Carter Mack, an investment banker who served on the task force that wrote the recommendations for the IPO portion of the act, estimates that more than 80 percent of emerging-growth companies are filing confidentially.
“There’s a big backlog,” said Mack, president and co-founder of JMP Group Inc. in San Francisco. “Twitter filed because of that and because Internet stocks have done well recently.”
Twitter is just small enough to qualify. The company’s advertising revenue is projected to rise 63 percent to $950 million next year from $582.8 million this year, according to EMarketer Inc.
A group of companies with billion-dollar valuations on the private market will be watching closely. Box Chief Executive Officer Aaron Levie said earlier this year that his business-software company will likely go public in 2014. Airbnb, operator of a home-rental website, was valued at $2.5 billion last year. Square, the payments startup run by Twitter co-founder Jack Dorsey, achieved a valuation of $3.25 billion a year ago after an investment from Starbucks Corp., while document storage provider Dropbox was valued at $4 billion in a 2011 financing.
Kim Rubey, a spokeswoman for Airbnb, Aaron Zamost, a spokesman for Square, and Michael Moeschler, a Box spokesman, all declined to comment. A representatives from Dropbox didn’t respond to a request for comment.
Twitter is unusual in even announcing that it’s filed. Most JOBS Act candidates, including Workday Inc., Tableau Software Inc., Ruckus Wireless Inc. and RetailMeNot, didn’t disclose anything until making their S-1 prospectus public.
SolarCity Corp. was an exception. The provider of rooftop solar systems, whose chairman is Elon Musk, announced its confidential filing in a press release in April 2012. The company filed its public S-1 on Oct. 5, ahead of the December debut.
Some high-profile Internet IPOs that filed under standard disclosure rules paid the consequences of heightened scrutiny.
Facebook Inc., which held one of the biggest IPOs in U.S. history last year, lost more than half its value in the months following the deal. The prospectus was pored over for three months before the offering by analysts, investors and reporters.
Groupon Inc. fell by more than three-quarters after its 2011 debut and was publicly ridiculed during the SEC review because of its accounting methods and exorbitant losses. Neither of those companies would have been eligible for the JOBS Act provision, because they were too big.
Sixteen months have passed since Facebook’s troubled offering and the market has bounced back. The social-networking service is finally trading above its IPO price and other consumer-Web companies like Trulia Inc. and RetailMeNot have soared since their IPOs.
In addition to the JOBS Act, “we’re seeing a recovery from the hangover effect of the Facebook IPO,” Crowe said.
For its size, hype and growth, Twitter is not the kind of company that the JOBS Act was designed for, said Erik Gordon, a private-equity and law professor at the University of Michigan in Ann Arbor, who spoke with legislators when the bill was being drafted.
Twitter is valued at more than $10 billion, based on a public filing last month from an investor. It can afford the IPO process and won’t have difficulty attracting underwriters and investors, Gordon said. He said the revenue cap for an emerging-growth company should be lowered to $500 million.
“Twitter is the last IPO in the world that needs the benefits of the JOBS Act,” Gordon said. It’s unfair to investors, who get “a shorter period in which the S-1 is public for you to tear it apart and do a thorough analysis,” he said.