September 13, 2013
What Twitter's Confidentially Submitted S-1 Means
Posted by Usha Rodrigues

You've probably heard by now that Twitter tweeted news of its confidential submission of an S-1 for SEC review.  DealProfessor Steven Davidoff laments this JOBS-Act-enabled secrecy.  Broc Romanek has some thoughts, including a reflection on the amusing question of the meaning of "..." in the context of corporate communication.

I've been doing some empirical research on IPOs (of which more later) that cleared up a misunderstanding I'd had about the emerging growth company IPOs.  I'm posting about it in case others labored under the same misconception.  I had thought that if a company filed a confidential S-1, it was never seen--a free look, so that the first public S-1 was a polished S-1.  But that's not the case.  When the first official S-1 is filed, any prior confidential S-1s and amendments must be disclosed.  Immediately following the JOBS Act, draft registration statements were disclosed as an exhibit to the public S-1.  Now the SEC has a DRS tag to identify them. The net effect is of disclosure delayed, not disclosure denied--as long as the company eventually files a public S-1. 

 Unpersuaded by the reassurance that everything in the draft S-1 will eventually come out, Davidoff writes:

Yet there might be value in having the regulator’s critique of a company’s I.P.O. occurring more or less simultaneously in the public eye. For example, both Zynga and Groupon received pushback from the agency over their accounting methods. This arguably allowed the investing public to better assess the financial results...But for Zynga and Groupon, the experience probably wasn’t so great, because it led to sharp criticism of their filings and put their stock offerings on a back foot. In both cases, the S.E.C. process raised warning signs that turned out to be accurate about these companies.

But if Zynga and Groupon had used JOBS' confidential S-1 filing, the market would eventually have learned about the SEC's concerns about their accounting.  I guess the question is one of how much momentum matters in a public offering, whether bad news at the outset is somehow worse than bad news once the ball is rolling.  The Google IPO certainly suggests that little setbacks along the way can have a big cumulative effect, even if the IPO is a hot one.

I'm wondering if others have an opinion on this.  Is disclosure delayed disclosure denied? 


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