Twitter's 'stealth IPO' shines spotlight on JOBS Act's effects

SAN FRANCISCO — In fewer than 140 characters, or 24 words, Twitter Inc. disclosed that it was planning the highest-profile public stock offering since Facebook Inc.

But that was about all it did, leaving stunned investors and analysts scrambling for nearly two weeks to find out more. Sometime this week or next, they may finally get the details as the micro-blogging service is widely expected to make public its secret filing.


Twitter's "stealth IPO" has thrown the spotlight on a controversial law passed almost two years ago that rewrote the rule book for start-ups seeking to go public.

Congress passed the Jumpstart Our Business Startups Act in 2012, which included a provision that enabled young companies to file their IPO paperwork confidentially. After being vetted by regulators, Twitter has to publicly reveal the IPO filing documents only 21 days before it begins pitching its stock offering to investors.

The JOBS Act was a major victory for Silicon Valley, where tech leaders hoped that cutting the costs and headaches of going public would reverse the steep decline in IPOs over the last decade.

More than 18 months after the law went into effect, nearly all eligible companies are opting to file privately for their IPOs. Although the practice has become widely adopted, it's less clear what effect the new rules have had on the IPO market.

Supporters point to the increase in IPOs this year as evidence that the new law is working. But many other observers say IPOs are up thanks to economic factors, and they worry that the law will hurt the process by giving investors less time to evaluate companies.

"It's a very mixed bag," said Lise Buyer, founder of Class V Group, which advises companies on their IPO process. "What's appealing about it for companies is that they can keep their information confidential until they're absolutely sure they're going to IPO. From an investors' standpoint, that's not helpful at all."

The JOBS Act created several exemptions for so-called emerging growth companies looking to go public. Companies with less than $1 billion in revenue could submit fewer years of financial information, less data on executive compensation and could opt out of some types of audits. They were also free to test the waters for their offerings by having conversations with analysts and investors before the filing became public.

But the most widely used of all the new provisions is the confidential filing. Of the 57 companies that had filed to go public in the third quarter as of late last week, 49 of them, or 86%, did so under the JOBS Act, according to research firm Dealogic.

This change had gone largely unnoticed by most people until last month when Twitter tweeted its announcement, something it was not required to do.

In Silicon Valley, the law was seen as one of the region's biggest political triumphs.

The region had been suffering through an IPO drought since the dot-com bubble burst in 2000. According to Securities and Exchange Commission statistics, the U.S. had an annual average of 311 companies go public from 1980 to 2000. From 2000 to 2011, the annual average fell to 102 IPOs.

Many blamed the drop in IPOs on costly new regulations imposed by the Sarbanes-Oxley bill passed in the wake of corporate scandals such as Enron and WorldCom.

Others pointed to structural changes in the technology industry, which had become more mature and had begun to focus on consolidation, or the stock markets, where the number of public companies overall has been falling since the late 1990s.

Whatever the case, the shift was considered bad news for the U.S. economy, because companies that go public tend to create more jobs than those that get acquired by another company.


The trend hit Silicon Valley particularly hard. IPOs are the mother's milk of the region's innovation economy. They provide big returns to entrepreneurs and venture capital firms, which then use a portion of that money to invest in new start-ups.

In 2011, an ad hoc IPO Task Force was formed with entrepreneurs, venture capitalists and lawyers to study the problem and propose fixes. Joel Trotter, a partner with the Latham & Watkins law firm and a task force member, said the group wanted to find a way to nudge more companies toward an IPO rather than an acquisition.

"There are so many companies today that are household names that started off as these small companies," Trotter said. "We wanted to help restore the balance."

The group eventually proposed creating an "IPO on-ramp" for emerging growth companies, or those with less than $1 billion in annual revenue. They would be exempt from some disclosure rules while they prepared for their IPO, and then for up to five years after they went public.

Their report became the basis for the JOBS Act. As the bill made its way through Congress, two other bills were folded into it. One bill allowed for crowd funding of investments in start-ups. Another raised the minimum number of shareholders a company must have before it is required to file public financial statements.

The JOBS Act was criticized by shareholder advocates and even by the chair of the SEC, who believed that less transparency would be bad for shareholders. But politicians in both parties supported it because it enabled them to claim that they were focused on creating jobs, cutting government regulation and not spending any money in the process.

"It was feel-good legislation which allowed both parties to display bipartisanship," said Jay Ritter, finance professor at the University of Florida. "It's not quite as good as a resolution praising God, motherhood and apple pie, but there were some similarities."

More than 18 months after the IPO on-ramp rules went into effect, many supporters contend that the new rules have been an unqualified success.

This year has been the busiest year for IPOs since the 2008 global financial crisis. There have been 152 so far, topping 145 in all of 2012, according to Dealogic.

The IPO market is on pace for its the best showing since 2007, when 288 companies went public, according to Dealogic.

"I think it's working very much the way it was intended to work," Trotter said. "It's providing some real benefit to companies looking to go public. I don't think it's a coincidence that we're in the best IPO market since before the financial crisis. The new process is a game changer for entrepreneurs."

But Buyer of Class V Group, who has advised on such IPOs as that of Google Inc. in 2004, is more dubious. She says the uptick in IPOs this year is more likely because of the low volatility of the stock markets, the increased money pouring into mutual funds and the stable overall economy.

She said the new rules not only don't help much, they also have created fresh issues. For instance, companies still can't tell their employees that they have filed confidentially unless they tell everyone, as Twitter did recently. Because the window between the IPO filing becoming public and the stock trading is smaller, employees have less time to prepare their financial strategies to deal with their newfound wealth.

"From my perspective of having worked with companies in both circumstances, it's not been very helpful," Buyer said.


What is ultimately hard to measure, however, is what the IPO market would look like today without the JOBS Act in place.

"How many of them wouldn't have happened if it weren't for the JOBS Act?" said Dan Winnike, an attorney at Fenwick & West. "It's not clear that very many went public only because they didn't have to tip their hands."

Twitter: @obrien

Twitter: @LATwalter

O'Brien reported from San Francisco and Hamilton from Los Angeles.