Confidential IPOs encourage more SEC submissions, more companies to launch

Confidential IPO filing - P2Binvestor blog article

Part 5 of a series of posts on the JOBS Act

One of the best things about the JOBS Act of 2012 was the creation of Emerging Growth Companies, or EGCs.

EGCs were given several new growth opportunities under the Act, not the least of which was the ability to submit a confidential Initial Public Offering (IPO) for review by the U.S. Securities and Exchange Commission.

Under the Act’s so-called five-year IPO On-Ramp, EGCs (companies with less than $1 billion in annual gross revenue during the immediately preceding fiscal year) can now make a confidential IPO draft registration submission to the SEC that is not subject to public review.

The change preserves a company’s confidentiality while the SEC review is ongoing and allows the draft statement to never be made public if the company decides to cancel its offering.

According to a September 19, 2014, blog post by Ward & Smith P.A. Attorneys at Law, “Confidential (IPO) submissions have permitted Emerging Growth Companies to begin the arduous process of seeking SEC approval of offering documents without public disclosure of sensitive information. The ability to terminate the review without public disclosure has removed a huge downside to commencing the IPO process.”

Without a confidential SEC draft review of a company’s IPO submission, the company is vulnerable to competitor attack, the blog noted.

“Competitors often use the information in the registration statement against young companies that file for IPOs. If a company becomes a public company, that information is fair game.”

Young companies also can “test the waters” for interest in their IPOs from high-net-worth individuals so they can more accurately determine the level of interest in their company before incurring the expense of registration.

“Both the ability to test the waters and the ability to have filed information remain confidential enable businesses and their investors with better control over the timing of the IPO process and the effect on the company,” the Ward & Smith blog said.

“If the IPO filing is withdrawn, the company has not damaged its reputation with a big public failure.”

While the SEC does not publish statistics on the number of confidential IPO submissions it receives, some experts are estimating that up to 87 percent of new companies have taken advantage of the benefit since the JOBS Act adoption.

These changes in SEC IPO provisions were made to staunch an ongoing sharp decline in publicly traded companies listed on U.S. exchanges. In 19976, there were 8,823 companies publicly listed—a number that fell to fewer than 5,000 in 2011.

The number of companies going public through an underwritten IPO also fell dramatically during that period, from a high of nearly 1,300 in 1996 and 1997 combined to fewer than 200 during the combined years of 2010 and 2011.

One recent bit of news seems to reinforce those trends.

A December 19, 2014, USA Today story reported that 2014 has seen the most IPOs since 2000, considered a high-water mark as the year of the dot-com IPO peak.

As of that date, a total of 273 companies had raised nearly $85 billion through their IPOs—up 23 percent over 2013.

The USA Today story said the IPO outlook for 2015 hinges on the health of the broad market, but if the market can continue to push to new highs it should encourage even more deal-making.

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