| WASHINGTON, Sept 13
WASHINGTON, Sept 13 Twitter's use of a
confidential initial public offering filing has reignited a
debate about a 2012 U.S. law that critics say denies investors
time to digest a company's financial information and erodes the
widely-held value of market transparency.
The social media giant can use the more secretive process
thanks to the Jumpstart Our Business Startups (JOBS) Act, which
loosened a number of federal securities regulations in hopes of
boosting capital raising, and thereby increasing job growth.
It included a provision known as the IPO on-ramp that
allowed "emerging growth companies" to keep draft filings with
the Securities and Exchange Commission under wraps while
negotiations over the disclosures occur.
Companies that don't meet the emerging growth criteria must
release their IPO filings, usually with hundreds of pages of
detail about their financial condition, risk factors and
ownership and management structure, months before they sell
This gives investors, financial analysts and journalists a
lot longer to analyze the company's prospects.
In the case of Twitter and other emerging growth companies,
they can delay the release until 21 days before a roadshow to
investors, which usually precedes the share sale by only a few
days or weeks.
They can also can disclose less information about pay for
executives and directors, and gauge interest by sophisticated
investors prior to filing IPO documents with the SEC.
The law helps true startups test the regulatory process for
an IPO without worrying about bad publicity if they decide to
later withdraw their paperwork. It also allows companies to keep
information from their rivals for longer.
Some critics say it's absurd to lump a household name like
Twitter in this category, even if it fits the technical
definition of less than $1 billion in annual revenue.
Its market value once listed is expected to be more than $10
There is also an irony in Twitter, which freely spreads
around vast amounts information in the blink of an eye, keeping
its own details out of view. It announced its IPO plans in a
bare-bones tweet late on Thursday.
J. Edward Ketz, an accounting professor at Pennsylvania
State University, said the idea of having a confidential filing
process is "dead wrong".
"It goes against everything the SEC is about," he said. "The
whole purpose of having the SEC in the first place is to get
corporations to provide full and complete information about what
Advocates of the JOBS Act say those arguments don't hold
They contend that keeping private the initial discussions
with regulators spares companies the heartburn of putting out
financials and then being prevented from elaborating on them due
to "quiet period" rules. Those rules prevent company executives
from making public statements related to information in the
They note that 21 days before the roadshow provides plenty
of time for public debate.
Ketz said Twitter is not doing anything illegal or wrong,
but said the decision is not encouraging for shareholders. "If
management at Twitter were more investor friendly, it seems they
wouldn't invoke the option that they have."
Others disagree, including Kate Mitchell, who chaired the
IPO Task Force, a private-sector group whose work advised the
Treasury Department and lawmakers, including Senator Charles
Schumer, a New York Democrat who helped draft the IPO on-ramp
provision of the JOBS Act.
She said that while the idea of a confidential IPO process
"sounds nefarious," it allows for the company and the SEC to
have a generous discussion about proper disclosures and
And it prevents companies from being put in the awkward
position of putting out some business information to some
potential investors and Wall Street analysts and then not being
able to publicly discuss it.
She pointed to the recent IPOs of Facebook and
Groupon. Groupon in 2011 was plagued by questions about
its reliance on what some considered to be unusual accounting
practices. Facebook faced serious doubts last year after its IPO
filing described its lack of mobile advertising as a risk
"All this hype was building around these offerings, and
there was limited and static communications," said Mitchell, who
is also a co-founder and partner at Scale Venture Partners.
She also said potential investors get to look at all the
SEC's red-line edits on the draft registration statements before
the company goes public.
The JOBS Act was a rare bipartisan bill that sailed through
Congress last year, even though Washington was generally
gridlocked over budget and other domestic issues.
The idea of fostering young companies at a time of sluggish
economic growth had strong appeal, and those critics concerned
about the erosion of investor protections were only able to make
modest changes to the legislation.
Besides allowing emerging growth companies to quietly
navigate the IPO process, the bill also opened the door for
hedge funds to advertise private securities deals and allowed
for crowdfunding, a capital-raising strategy that lets investors
take small stakes in private start-ups over the Internet.
Overall, roughly 250 companies have used the confidential
IPO process as of June 2013, according to the SEC, who will not
name the firms.
Among the known companies are some that are far cries from
start-ups. English soccer powerhouse Manchester United last year
used a confidential IPO to launch its offering in the United
States after abandoning earlier attempts in Hong Kong, Singapore
and the UK.
The architects of the Sarbanes-Oxley corporate
accountability law in late July mocked the notion that the
soccer club is an emerging growth company that is going to help
create jobs in the United States.
"They've been emerging for 120 years," said former U.S.
Representative Michael Oxley, drawing laughter from a conference
crowd last year.
Schumer, in a statement to Reuters, said the confidential
filing provision has been one of the most successful parts of
the JOBS Act. He said investors still have all the information
they need to analyze well in advance of the IPO.
"If Twitter meets the definition of an emerging growth
company, they're free to avail themselves of the relief provided
under the bill," Schumer said.
Even early on, some questioned whether the definition of
"emerging growth company" was too broad. Mary Schapiro, who
headed the U.S. Securities and Exchange Commission when the
legislation was being debated, had tried to lower the $1 billion
threshold but was not successful.
In a March 2012 letter to Senate Banking Committee Chairman
Tim Johnson and then-ranking Republican Richard Shelby, Schapiro
said she recognized the importance of reducing IPO obstacles for
small businesses, but was not sure the JOBS Act had found the
"A lower annual revenue threshold would pose less risk to
investors and would more appropriately focus benefits provided
by the new provisions on those smaller businesses that are the
engine for growth for our economy," she said.
Barbara Roper, the director of investor protection for the
Consumer Federation of America, said Twitter's use of the
confidential filing process undercuts the idea behind the JOBS
"It exposes the absurdity of the basic premise that this was
about small company capital formation," she said.