October 09, 2013
More Twitter: Why an IPO?
Posted by Christine Hurt

IPOs are hard and expensive.  IPOs expose issuers to all kinds of liability pre- and post-IPO and require ongoing disclosure.  The JOBS Act opened up the capital raising world by lifting private placement restrictions, most notably the ban on "general solicitation."  Usha announced it just the other day here.  I wondered if anyone would ever have an IPO after the ban was lifted here.  So why is Twitter going through an IPO? 

The alternative for Twitter is a private placement with general solicitation under Rule 506 (Reg D).  But, the comparison isn't IPO v. new 506, it's the "emerging growth company" IPO v. new 506.  As Usha pointed out, Twitter took advantage of the confidential registration provision of the emerging growth company exemptions.  Here is a blog post from Bob Thompson summarizing other items in the registration statements that an emerging growth company can avoid.  But, the registration process is still a pain, and it's still very expensive.

In a "new" 506 private placement, Twitter could tweet about its private placement all day long (unlike in an IPO pre-filing and pre-effective date) as long as it only sold to "accredited investors."  I'll go out on a limb and say that most IPO shares will be sold to "accredited investors," a definition that has gone unchanged for quite a long time.  With all that freedom and the same capital raising potential, it seems like a no-brainer.  The only hitch would be the expanded 2000 shareholder rule.  Twitter already has 2000 employees, so the probability that the number of shareholders would exceed 2000 is pretty high.  But let's put that aside for now.

Even without the 2000 shareholder rule, the general solicitation 506 may not be a great idea from the perspective of the current owners of Twitter -- the VCs, the founders, the insiders.  One of the benefits of an IPO is that it creates liquidity for the pre-IPO owners; in other words, they can cash out.  For the founders and other early executives, the ability to cash out at least part of your holding is a great option; for the venture capital firms backing the IPO firm, cashing out is a must.  However, if the shares are not registered, then shareholders would have to sell the restricted securities themselves under Rule 144, which is going to put a 1% of the public float condition on affiliates/control persons, which may encompass executives and large shareholders.  Twitter's S-1 leaves blank how many shares individuals plan on selling in the IPO, but 4 officers own over 1% (Evan Williams owns 12%) and five VCs own over 5%.  And, the purchasers of those shares would take them as restricted shares, so the  price would be discounted for that.  For cashing out, IPOs, even with lock-ups, are the better route.

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