Feb 15, 2017

The little-known law helping Snap go public

Photo illustration by Greg Ruben / Axios

Months before Snapchat's parent company publicly filed its IPO documents on Feb. 2, it confidentially sent a draft version to the Securities and Exchange Commission for review.

Why? Because Snap is an example of what the SEC classifies as an Emerging Growth Company, a category created by the JOBS Act of 2012 to ease the IPO process and make stock markets more accessible to more companies.

Why it matters: This rule is dominating public offerings. Since April 2012, when the JOBS Act went into effect, about 83% of all IPO registrations and 87% of all completed IPOs have been from EGCs, according to Ernst & Young. It also helps promising startups stay private longer, reducing possible upside for prospective public investors.

Last year, the SEC received 204 confidentially-submitted filings for IPOs. Between April 2012 and the end of 2016, the total number stood at approximately 1,250.

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Data: Update on emerging growth companies and the JOBS Act, Nov. 2016; Chart: Lazaro Gamio / Axios

Criteria: To qualify as an EGC, a company must have less than $1 billion in gross revenue for its most recent fiscal year and not have issued more than $1 billion in non-covertible debt over the past three years.

The perks: EGCs get several advantages when going public.

  • Confidentially submitting their IPO registration for feedback.
  • Testing the waters with investor meetings before a formal IPO roadshow.
  • Submitting only two years of audited financials (instead of three).
  • Providing limited executive compensation information.

Another portion of the JOBS Act also raises the limit of pre-IPO shareholders a company can have and excludes employees. "It puts the control back in the companies' hands," Nasdaq head of Western U.S. listings Jeff Thomas told Axios. "Anytime the companies can get earlier feedback from investors, that's obviously going to help the companies."

The downside—less public data:

  • There's no publicly available data about companies that have confidentially filed to go public, so it's more difficult to predict upcoming IPOs.
  • During the "on-ramp" period—the first five years post-IPO—companies can choose to disclose more limited financial information.
  • Over the past four years, 96% of EGCs chose to provide reduced executive compensation disclosures, according to Ernst & Young.
  • Over the same period, 69% of EGCs elected to provide just two years of audited statements instead of three, while only 15% have said they'd delay on complying with new accounting standards until they apply to private companies.

What to watch: We'll see more companies take advantage of the JOBS Act benefits when going public. But it's become a double-edged sword for so-called "unicorn" companies, or private companies valued at $1 billion or more. On one hand, it makes going public easier and lets firms retain some of privacy. On the other, the raised shareholder limit helps them stay private longer, something that many investors believe has contributed to a private tech company "bubble" of firms.

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