Inching–or Tweeting–Forward with the JOBS Act

hummingbirdTo most people, if they still remember, the JOBS Act, or the “Jumpstart Our Business Startups Act” is about crowdfunding for the little guy, the unaccredited investor. Today, an accredited investor is defined as having a net worth of $1,000,000 with a spouse, or net income of $200,000 in each of the last two years or $300,000 including a spouse, with the reasonable expectation to continue said income stream.  So, we’re talking about the vast majority of America.

We have yet to see anything in the crowdfunding arena, as the full criteria for unaccredited investor crowdfunding has yet to be published.  The curtain opened a tiny bit in July, where terms for the ability to advertise private placements, was announced.  It seems, advertising is only to be targeted at the accredited investor.

With the Twitter IPO tweet, we are witnessing an additional provision of the JOBS Act.  Twitter’s “silent” filing is evidence of such.  Twitter tweeted, in 135 characters, that the Company had filed to go public.  Pursuant to the JOBS Act, companies with under one billion dollars in revenues have the option of keeping their filing documents silent until 21 days before their IPO.  So, now we know that Twitter is under $1 billion in revenues.

The thought is that small companies need time away from the limelight to come to terms with major issues that are raised by the SEC.  When they decide to move forward, with all alacrity, the S-1 filings are viewable by the public.  May the games begin.  In reality, Twitter may have filed their IPO months ago, and are only now signaling their intentions to go public, in the near future.

When I was doing IPO’s, which is some of the most rewarding work that I have done as an investment banker, we waited until we received the SEC’s comments on our S-1 registration statement to schedule a roadshow.  A roadshow is so expensive, intense, and fast moving, that it is foolhardy to start a roadshow before comments are received from the SEC.  Economic conditions can change in an instant, and our goal was to minimize the risk of an incomplete IPO.  All due speed.

Once you have received comments from the SEC, you have a reasonable expectation of timing the roadshow such that you can build an institutional book and price the deal after the last day of the roadshow.  A typical roadshow will start in London and then go all the way West to San Francisco, Los Angeles and San Diego, and then move East:  Chicago and Minneapolis to New York City and Boston.    Other cities might get thrown in along the way:  Dallas, Baltimore, Houston, Kansas City, depending on specific institutional investor demand.

The roadshow is split second timing.  We would do several cities in a day, and rush from the plane to the waiting car to the investor meetings, and back to the airport.   And don’t get me started on retail versus institutional demand.  If there is no institutional demand, there is no IPO.  Retail salesmen look to the institutional folk for guidance and  follow institutional every time.

Since Twitter’s was a silent filing, we have no knowledge any of the particulars, including when it filed, or at what valuation.  The $10 billion number is being bandied about.   Critics say that potential investors will have insufficient time to do due diligence on a potential investment.  I’m not so sure.  It seems to me, that Twitter management will have fewer day-to-day distractions as a result of the silent filing.  Which should, overall, be good for the Company and its investors.

One of the real risks post-IPO is an earnings miss due to the disruption brought about from the IPO.  Typically, though not always, the company will make the next quarter numbers, but the quarter after that is fraught with post-IPO hangover risk.  And nothing makes a salesman more furious at the banker than an earnings miss by a recent IPO client.  The love just keeps on getting passed around.

SEC reviews are taking longer, and there is great potential for unnecessary business disruption with all the disclosures a company must make in its S-1 filing.  It’s only immediately before the roadshow that a company will put an offering range on its filing, to finally signal its IPO valuation goals.  Twenty-one days should be sufficient for employees to determine the potential value of their stock holdings, for competitors to review the financial numbers, and for potential investors to review the documentation.  Indeed, half the investors had only performed cursory reviews of the prospectus before the roadshow meeting with management.   The other half had gone through the prospectus with a fine tooth comb.

Frankly, I’m a bit skeptical that this provision of the JOBS Act is all that important to the company pursuing the IPO, the investors, or the public.  It’s nice for the company, but not crucial.  So what’s the big deal?  Does anyone want to weigh in?

Next month, we’ll see the advent of another provision of the JOBS Act:  advertising private placements by brokers to accredited investors. Step-by-step.